How do you account for VAT on charging expenses?

September 22, 2015

This is an interesting area which many clients get wrong.

Let’s suppose you are a service business and you do some work for a client which you will charge £1,000 for.

To do the work, you have to go to the client’s premises and therefore incur travel expenses.

You agree with the client that you will charge 45p per mile and it is a round trip of 20 miles – £9. You also have to stay in a hotel which costs you £50, which again, the client agrees to pay.

Your invoice looks like this:

Service £1,000
Travel £9
Hotel £50
Total £1,059

So far so good.

However, make sure that you also include the travel cost in your expenses as well as your sales invoice.

The profit on this job should be £1,000 i.e. you’ve charged your client £59 but incurred £59 of cost which nets off.

If you forget to include the £9 in your costs, you will effectively be paying tax on the £1,059.

If you are VAT registered, there is something else to know which catches out even more people.

The invoice, if you are a VAT registered, your invoice should look like this:

Service £1,000
Travel £9
Hotel £50
Net £1,059
VAT @ 20% £211.80
Gross £1,270.80

Notice that I have charged 20% VAT on the total cost. Wait, you’ll say, doesn’t the travel already have VAT included, therefore shouldn’t it be split out.

You would think! But you would be wrong. Yes, you say, but you are charging VAT on VAT. You are correct but as Punch once said ‘that’s the way to do it’.

I appreciate that it makes no sense but that’s the rules!

Of course, if you are not VAT registered, you can ignore the last part.

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