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What are the differences between recharged expenses and disbursements?

Businesses will incur expenses when delivering their services to clients, and some may also purchase goods and services on behalf of their clients. These recharged expenses and disbursements are treated differently for tax and VAT purposes and must be invoiced accordingly.

What is a disbursement?

Payments your company make on behalf of customers for goods and services, which are used by the customer are called ‘disbursements’. This implies that no VAT is charged on them when invoicing clients.

Examples of a disbursement

  • Website hosting package purchased on the client’s behalf

  • Solicitor paying stamp duty on a client’s behalf

  • Funeral director buying flowers for a client

What is a recharged expense?

Recharges are costs that your business incurs when supplying goods and services to your customers.  It’s standard accounting practice to add VAT on to a recharged expense.

Examples of a recharged expense

  • Airline tickets that you buy to visit a client or to travel to a job. You then pass this cost onto your customer

  • Postage costs you incur when you send letters to your customers, these are normal business costs and you must add VAT if you recharge them

  • Bank transfer fees paid when transferring money from your business account to a client’s account. Despite the bank’s fee being exempt from VAT, if you recharge the fee you must charge VAT, because it was for a service provided to your business and not to your customer

How do I go about charging VAT on recharged expenses?

If you’re VAT registered, you’ll need to charge VAT to the amount recharged to the client.

There is no requirement for you to charge the client the same amount you paid. For example, I could pay £5 for a train ticket but I can charge my client £10 if I want. The only requirement is that the £5 expense is recorded, and the £10 income is accounted for with an added £2 in VAT.

The facility in Crunch to re-charge expenses is purely a time-saving convenience that allows you to re-charge expenses without laboriously typing line items.  If you want to change the amounts re-charged, don't select them as re-chargeable expenses when you enter the expense in Crunch, instead, you can add them yourself as a line item on your sales invoice.

Example of an invoice with Recharged expenses and disbursements

Description

Rate

Net Amount

VAT

Gross amount

Two days business Consultancy

£500 per day

£1,000

£200

£1,200

Add: Recharged expenses - Two night hotel costs

100 per day

£200

£40

£240

6 Business consultancy books purchased on client behalf (Disbursement)

£50 per book

£300

NA

£300

Total

 

£1,500

£240

£1,740


 

Example: adding VAT to a recharged expense when on the flat rate scheme

You pay £120 for an expense which includes £20 VAT.

On the Flat Rate scheme, you do not claim back VAT on your purchases, therefore the total cost to you is £120.

If you charged the net amount of the expense (the cost of the expense excluding VAT) you would only recharge £100 and the system would add £20 VAT to make a total amount billed to your client of £120.

You then would have to pay the Flat Rate percentage for your sector on £120 to HMRC as part of your VAT return. In our example the percentage is 13.5%, meaning the amount you pay to HMRC is £16.20. You would be left with £103.80

If you let the Crunch system add VAT on top of the gross re-charged expense (the cost of the expense including VAT), then you are charging £120+VAT = £144.  You will owe HMRC 13.5% of £144 = £19.44. This would be the advised option, if it's commercially viable for your clients, as it ensures you get back all the money spent on the expense.

Last Updated: 21 Mar 2018 12:28PM GMT
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