Self assessment and costs paid on behalf of clients

[Mitch100]

Dear All

I have what I suspect is a silly questions. But I cannot find the answer on this website or other websites. Apologies if this has in fact been answered before.

My question is:

I have been running a band agency (i.e. a type of service provider) for a few months as a sole trader and I often have to pay costs on behalf of clients for related services from other service providers (e.g. mail forwarding), which I then reclaim from the client. These costs would be classified as a disbursement if I was VAT registered, but I am not VAT registered and this is not the nature of my question.

The issue is I am filling in my first income tax self-assessment form and I do not know how to account for these reclaimed costs. Are they expenses? Are they costs of sale (assume not as not products)? Anything else?

I feel the answer should be obvious but can't work it out. Any suggestions?

Many thanks.

Mitch

[nikkisizer]

Hi Mitch,

You would account for these as a cost of sale. Expenses would normally be your own business expenses such as your telephone charges, office rent charges etc.

As you are being re-imbursed by your client though you should enter the figure as part of your income figure then also show it as a cost of sale so the overall effect is zero.

[Mitch100]

Thank you for your kind reply, Nikki.

I now understand that when acting as agent for third party services, the cost of providing the client that third party service is a cost of sale in the same way as it would be for a product.

I had been in part put off by the statement on the Business Link website which states 'Cost of sales does not usually apply if you supply a service only'.

Thank you very much

Mitch

[nikkisizer]

You are most welcome Mitch, if you need any help feel free to contact me

Have a nice weekend!

[maths]

I suggest the answer depends upon the precise nature of the arrangements.

X contracts with Y re the supply by Y to X of some service.

X then asks Z to pay Y and X then reimburses Z.

Neither the cost incurred by Z nor the reimbursement to Z is part of Z's income/expenses for tax purposes.

If X asks Z to contracts with Y as X's agent then again neither the amount paid by Z to Y nor the amount paid by X to Z is income/expenses of Z for tax purposes.

Under neither of the above scenarios is Z for tax purposes a principal contracting party; their income is for example a commission charged to X for the provision of their involvement.