How to treat VAT on recharged expenses
When providing services to your client, occasionally you might need to pay for items on their behalf. How do you then treat the VAT on the expenses that you recharge to the customer?
There is one simple rule that you need to keep in mind: all recharged expenses carry VAT, unless the item is a disbursement.
If you pay an expense on behalf of your customer and that is purely an expense of the customer then you consider this as being a disbursement. For example, an accountant may pay the Companies House fee for filing the confirmation statement for one of its clients, but that fee belongs to the client. It is the client/company who gets the benefit of the fee payment, and who ‘uses’ what is paid for by the fee. As it is only the client that uses it, it is a disbursement, so no VAT can be charged.
However, if the accountant sends some documents to his client for signature by courier, this fee belongs to the accountant. It is an expense they have incurred as part of their work and chosen to recharge – as part of their work done and because it is related to the client. If such a cost is recharged to the client, it must carry VAT.
An important thing to keep in mind is that recharged expenses and disbursements need to be clearly labelled and distinguished on the VAT invoice.