Charging VAT on client expenses

Accounting
1

I’m an IT contractor on the flat rate VAT scheme. My client asked me to travel to another site, so I parked at the station and paid £7.00 for a day’s parking.

When I invoiced the client I added the expense as a new line and charged VAT. So the client pays me £8.40 and I then pay HMRC the £1.40 in my VAT return, leaving me with the £7.00 I paid. I believe this is the correct way to handle it?

My client disagrees and says that I should be invoicing £5.83 plus VAT = £7.00 but if I do that I will still be liable to HMRC for the VAT on my invoice leaving me out of pocket after I’ve paid HMRC.

I know this is a trivial amount and probably not worth worrying about, but I’m more concerned about making sure my books are correct than the odd £. If I go down the route of invoicing the £5.83, how do I account for the missing £1.17?

Thanks, Steve

2

Hi Steve,

Firstly, I’ll just point out I’m not an accountant so I wouldn’t be able to advise on the rights or wrongs of any particular method. However, I’ve done a bit of a search to try and assist you here and come across two articles on Accounting Web (links below), which seem to point to the same answers of:

  1. The client generally shouldn’t be expected to pay more than what you did
  2. It depends on your agreement with the client


I’m sure there are other users or accountants with more experience of this scenario than what I have, so we’ll leave this topic open for a few days and they may add their comments below.

3

Thanks. I think the best advice is in the second article, which is that it isn’t worth annoying the client for the sake of a small amount. The comments about “making a profit from” the flat rate scheme don’t hold since the rate for contractors was increased to 16.5%. Now there is very little difference between the VAT received and the VAT paid to HMRC.

The second article also references the HMRC guidance which makes it clear that travel expenses are always recharges, not disbursements, and therefore VAT should be charged. The link for this article is: https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

4

Indeed, it seems to me that the only benefit of being on a 16.5% FR is that it’s easier to calculate if you’re not using a system like QuickFile to crunch the numbers for you. If you have QuickFile to do the hard work then you might as well switch to standard VAT rather than flat rate.

5

@ian_roberts There is still some potential benefit of being FR, even when you’re on 16.5% if your purchases are very low in value or generally zero/exempt. HMRC have in most cases ruined a lucrative loophole though!

6

I suppose 0.17% of £230,000 is still worth a few hundred quid.

7

If you are billing more than £83,000 you have to do some kind of VAT and flat rate is easier to administer, so I think I will be sticking with if even if I do have to consider it a cost of doing business.