Charging Your Client or Customer Expenses: How to Do It Correctly!
Author: Russell SmithJune 6, 2015
Confused about how much to charge your customers for expenses? Let the team at our accountancy firm in Leeds help you figure it out.
It isn’t the most pleasant of activities, but unfortunately, it has to be done. Charging clients for expenses is an important part of the self-employed service industry.
Yes, you make money by charging a service fee, but if you incur other costs while on the job (travel expenses, for example), footing that bill yourself could mean skirting the line between profitability and, well, unprofitability.
Charging your customers helps keep your business afloat, yet in the experience of the team here at our accountancy firm in Leeds, a lot of self-employed people and small businesses are getting the process wrong.
I know what you are going to say: how can you mess up billing your clients?
Well, here’s the problem.
The Mistake You Are Making
This is a common mistake small business owners make. You’ve come to an agreement with the company you are working for about expenses. They’ve agreed to pay for your time as well as your costs. Good; it’s a fair deal.
Here is an example copy of the invoice you provide your client:
Looks good — you’ve covered your costs. However, far too many businesses leave this as it is. They’ve got their expenses paid, their costs covered, so they file this invoice and that’s the end of it.
However, you are still paying for the tax on those expenses. You’ve now paid out for them and then billed them, which drives your taxable income up when you haven’t actually earned anything extra.
If you keep doing this, working and claiming costs, your tax will continue to rise when it shouldn’t.
But before we get into the solution, there is another issue: businesses that are registered for VAT. If you charge VAT, your invoice will look more like this:
But, unfortunately, you are still doing it wrong.
Okay, so we’ve talked enough about what mistakes you are making, it is time to look at solving these accounting problems and keeping your company’s coffers healthy.
Our Accountancy Firm in Leeds Talk Solutions
Let’s start where we left off: with the VAT.
The above is NOT what your invoice should look like. This is what your invoice should look like:
Now, I know what you are thinking: travel costs already have VAT included, don’t they?
Correct, but if you don’t charge VAT on them again, you’ll be left to cover the extra VAT costs incurred when you register your business’ income.
If you don’t inform your employer of your methods, you may receive some raised eyebrows, so make sure you do. However, if they question it, tell them the logic. These are costs that they have incurred by hiring you as a service provider. You should not be left to pay extra tax because you needed to make expense claims to offer your services.
Now, we come to expense costs raising your tax bill.
Some of this cost can be offset by claiming them as expenses yourself when filing your tax return. However, this only works up to a certain amount. If your business tries to claim over the maximum expenditure allowance, you’ll end up footing the bill yourself.
The solution here is all about making predictions. Will your business max out its expenses allowance this year? If so, you’ll have to consider charging your clients extra for the tax loss you’ll receive, simply taking that loss yourself.
How much you then charge is based on your income, which is where things get complicated.