VAT on Expenses

[MrSmiffy]

I run a consultancy with several clients. In the course of my work I run up expenses for each of them, mainly travel, subsistence, phone and postage. Until now I have simply recharged my clients with the gross amount of expenses, including VAT if applicable (mainly subsistence) and then added VAT on to the total. One of my clients is now unhappy with this treatment and although accepting that my charges are not disbursements wants me to recharge the amount net before adding VAT.

I have read Section 25 of the VAT guidelines, which seems to agree with me and spoken to the VAT helpline, who also seem to agree. None of this cuts any ice with the client. Can someone confirm if I am correct, or should I just give in? If I am correct, have you got a convincing argument I can use?

I apologise if this has already been answered, but I couldn't find it on the forum.

[spidersong]

I'd agree with the client.

You incur £120 of (VATable costs), you claim back the £20 of VAT, you then charge your client £144 (£120 plus VAT) when you've only actually suffered costs of £100. I'd be pushing for you to charge net plus VAT as well, basically on any taxable expenses you're making a 20% mark up, when the client probably assumed they'd be meeting expenses at cost.

If you charge at cost then you incur £120, claim back £20, charge the client £120, pay over £20, you've covered your outlay and the client hasn't lost out by having VATable expenses marked up (when presumably non-VATable ones haven't been).

Of course how you recharge expenses is between you and your client, if the agreement is they would pay gross plus VAT then that's the agreement. All the VAT office can insist on is that you charge VAT on all your expenses, if your overall supply is taxable, what level you set your expenses recharges at is nothing to do with them.

[spidersong]

p.s.

Section 25 of Notice 700, makes no mention of whether recharges should be net or gross, all it mentions is expenses you incur. If you're VAT registered then the only element you actually incur is the net value of the supply as the VAT element is recoverable from HMRC.

[section 44]

These aren't disbursements.

Any payment from your client to you is payment for the supply that you are making to your client even if the quantum of the payment has been arrived at by reference to expenses incurred by you.

You should be charging your client VAT on these payments and issuing your client with a VAT invoice.

If you can recover the VAT that you have incurred on the expenses then it seems reasonable that you don't include this in the cost to the client.

For example:

You incur expenses of £100 plus VAT (£120).

You recover the input VAT of £20.

You charge your client £100 plus VAT (£120) and account for the VAT of £20 to HMRC.

[Generix]

As posters above state, purely a commercial issue - and I'll echo what the others said about disbursements;

The expenses described are unlikely to qualify as disbursements therefore (subject to the place of supply rules - to which I would apply the general rule [others will no doubt disagree]) they are VATable.

As a consultant I would expect your contract to mention your pricing on expenses, most would either state their hourly rates plus expenses, others state hourly rate, plus expenses +5%. (Obviously make sure your contact states prices are stated exclusive of VAT where applicable).

You should decide on a policy and include it within your contracts.

[bigfundamental]

Sorry for digging up this thread, but I have a related question to this discussion:

Let's say I work for company X, who hires Deloitte for a consulting job worth 4 million over one year, which will have travel expenses up to 400k. After reading all this, every travel and hotel will be taxed at normal VAT rate in an expense invoice.
However, airplanes and hotels are normally charged much lower VAT rates (in UK I believe 0% and 6% respectively). What if my company X asked for travel arrangements for the consultants to be made internally, hence the company would pay for it directly, incurring in the VAT applied to the purchase directly, much lower.
Could this be done? Could it be considered tax evasion?

I would appreciate some help with this! Thanks in advance

[robbob]

Let's say I work for company X, who hires Deloitte for a consulting job worth 4 million over one year, which will have travel expenses up to 400k. After reading all this, every travel and hotel will be taxed at normal VAT rate in an expense invoice.
However, airplanes and hotels are normally charged much lower VAT rates (in UK I believe 0% and 6% respectively). What if my company X asked for travel arrangements for the consultants to be made internally, hence the company would pay for it directly, incurring in the VAT applied to the purchase directly, much lower.
Could this be done? Could it be considered tax evasion?

Could this be done?

Yes and it will make commercial sense if it avoids any leakage, note ignoring the non vat registered traders and flat rate traders there isn't generally any vat loss - output vat charged by you with regard to expenses is input vat that can be reclaimed by you customers. There is no vat claimed by any business when they buy Airline Tickets in the Uk as no vat is charged.

Could it be considered tax evasion?

Nope -as mentioned above there isnt really any vat being evaded here anyway - situation is no different to a non vat registered individual not having to pay output vat on a sale or a flat rate trader who may benefit due to having low input vat clams, Some bods benefit due to the rules being the way they are.

[bigfundamental]

Let's say I work for company X, who hires Deloitte for a consulting job worth 4 million over one year, which will have travel expenses up to 400k. After reading all this, every travel and hotel will be taxed at normal VAT rate in an expense invoice.
However, airplanes and hotels are normally charged much lower VAT rates (in UK I believe 0% and 6% respectively). What if my company X asked for travel arrangements for the consultants to be made internally, hence the company would pay for it directly, incurring in the VAT applied to the purchase directly, much lower.
Could this be done? Could it be considered tax evasion?

Could this be done?

Yes and it will make commercial sense if it avoids any leakage, note ignoring the non vat registered traders and flat rate traders there isn't generally any vat loss - output vat charged by you with regard to expenses is input vat that can be reclaimed by you customers. There is no vat claimed by any business when they buy Airline Tickets in the Uk as no vat is charged.

Could it be considered tax evasion?

Nope -as mentioned above there isnt really any vat being evaded here anyway - situation is no different to a non vat registered individual not having to pay output vat on a sale or a flat rate trader who may benefit due to having low input vat clams, Some bods benefit due to the rules being the way they are.

Thanks for your reply! Just to make sure you understood what I meant: we would be avoiding some tax, as instead of Deloitte paying the airplane and hotel and then charging Company X an invoice with their net costs + 20% VAT, Company X would straight up purchase the airplane and hotel directly for the consultants, i.e. paying directly to the airplane and hotel companies the net cost + 0% or 6% VAT. So that would be a saving for company X, incurring on much less VAT.
So you wouldn't see any problem?

[absolutevat]

Note-Hotel accommodation is subject to the standard rate of 20% in the UK. Indeed there is no 6% rate. Many EU member states apply a reduced rate to hotel stays.

[robbob]

J

ust to make sure you understood what I meant: we would be avoiding some tax, as instead of Deloitte paying the airplane and hotel and then charging Company X an invoice with their net costs + 20% VAT, Company X would straight up purchase the airplane and hotel directly for the consultants, i.e. paying directly to the airplane and hotel companies the net cost + 0%

I don't understand the logic of that statement - presumably the extra 20% vat being charged is all reclaimable input vat so no overall net loss (or saving the other way round)