VAT on expenses and disbursements

truecockney Registered Posts: 94 ? ? ?
I work for an agency which operates under the self-billing scheme and have been questioned on our processing of expenses incurred by our sub-contractors in the undertaking of their work.

We obviously provide a service to our customers to find the contractors, but as some of our contractors operate through a Limited Company, this is where things get a little complicated.

- Our client (Cl) requests our contractor (Co) to travel off site to undertake work, therefore they are incurring the costs
- Cl asks us to reimburse Co the costs and bill them for the total cost only
- We bill C total costs, with VAT marked as exempt (we are not providing this as part of our service and are billing them for what we deem are disbursements as we are gaining no benefit out of them, nor using them)
- Co is VAT registered, but as we bill at VAT exempt, we reimburse as VAT exempt (so S gets reimbursed total expense claim only)
- Co asks for VAT, but we cannot(?) pay VAT as we are unable to reclaim nor bill for this, and this may end up accumulating VAT on top of VAT already. We consider that Co cannot charge VAT either as we (being their "customer") are not getting use out of the expenses.

Should we be billing and paying for VAT on these kind of costs? After all, we are not getting any benefit, nor did we request this expense to be incurred, and this isn't part of our service.

If it makes any difference, this can refer to hotel accommodation, travel, subsistence and anything else that may come with the job.

Sorry if this doesn't make sense... I'll answer any questions to fill in the gaps!



  • honada
    honada Registered Posts: 28 Dedicated contributor ? ? ?

    Have you tried referring to the HMRC website PN 742 section 11 VAT might be appropriate to your enquiry.

  • truecockney
    truecockney Registered Posts: 94 ? ? ?
    I did check over this, but none of it appears to apply to an employment agency and how we should be deeming these expenses (whether vatable rechargeable expenses, or non-vatable disbursements).

    The key points as far as we can tell are:

    - We do not authorise or pay for the costs nor have use of the expenses (train travel, mileage allowance, hotel, meals, etc)
    - Our client does not have use of these costs as it is the contractor that they employed through us that incurs the cost in the undertaking of their duties.

    We are just the middleman and we have billed and paid these 3 different ways with each time someone coming back and querying either the amount they get reimbursed (the contractor) or the amount that they are being billed (our client).
  • payrollpro
    payrollpro Registered, FMAAT Posts: 427 Dedicated contributor ? ? ?

    i can only answer this from my own experiences with agencies and self billing organisations and the charges I make for consultancy.

    As a registered business I must charge VAT on all of my invoices to clients and that includes all expenses, even if the expenses are exempt or already Vat charged. The charge made to the client is a taxable supply of service and therefore tax is charged on the total bill. The fact that a lot of the additions are, say, rail fares, or costs upon which I will be reclaiming VAT is irrelevant.

    This is easy for me because I hold all the documentation and the receipts belong to my company, despite the claims made by self billing agencies to the contrary.

    The difficulty occurs when the agency does not have the receipts and this can often call into question the ability of the agency to submit the appropriate charge to their client. However, as long as you have the tax document from the contractor, their own invoice or the self billed, created invoice, then you have a tax document and then do not need the individual receipts.

    The contractor is entitled to the labour charge, plus the actual gross cost of expenses plus the VAT on all of that because that is what they must account for to customs. The client is liable for the contractors charges, plus your fees plus VAT at the prevailing rate and the only problem comes if the contract is silent or ambiguous on the subject.

  • Damo8604
    Damo8604 Registered Posts: 12 Regular contributor ⭐ ? ⭐
    I worked for a management consultancy a few years ago and this topic came up quite a few times. The basics are, the contractor charges for his/her time, plus disbursements. If they are VAT registered, then they will apply VAT to the total.

    I struggled with this concept initially as I was seeing receipts for rail travel and thought "how can they charge VAT for rail travel" but I was assured that the contractor was correct and to look at it as a 'cost of supplying the service'.

    There is a section on the HMRC website that deals with disbursements as I did look it up all those years ago, here is a link to it.
  • truecockney
    truecockney Registered Posts: 94 ? ? ?
    Thanks, Damo. I had seen that link previously and this is exactly where things got complicated for us.

    Our contractors are bound by IR35. Therefore, when recharging an expense incurred that included VAT, they are entitled to recharge for the net value of the expenses plus VAT on all net costs (therefore not charging VAT on top of VAT).

    Between the IR35 and that HMRC link, we would make a profit, but also incurring VAT without being able to charge it.

    For example, if a contractor is claiming for:
    Hotel bill: £115; Train travel: £45.00; Parking: £15.00; Meals: £10

    They would be entitled to "bill" (according to IR35):
    Hotel bill: £100 (net); Train travel: £45.00; Parking: £15.00; Meals:£10
    Net Total: £170 + VAT = £195.50

    Being the agency, according to the HMRC link on disbursements, we should charge our client the total cost of expenses as disbursements (therefore non-VATabale as we had no use of the expenses incurred) of £185.00.

    With this example, we have made a £15 profit (which we feel is wrong) and our client, who requested the costs to be incurred and who gets any profit from the service, wouldn't be able to claim any VAT.
  • Damo8604
    Damo8604 Registered Posts: 12 Regular contributor ⭐ ? ⭐
    Yes I think you are right, just took a look at it again (and wished I hadn't!), HMRC does state that you have to charge the client as a disbursement and you get to re-claim the VAT :thumbup1:

    I suppose that is just the way it is! I guess you'll probably end up with the invoice going back and forth while it is queried over and over again!
  • payrollpro
    payrollpro Registered, FMAAT Posts: 427 Dedicated contributor ? ? ?
    Hi guys,

    I am in some agreement with the thread of this conversation but I have to disagree with the figures truecockney has given. I totally agree that the hotel bill is technically £100 plus VAT of £15 but the contractor is not necessarily obliged to strip off the VAT before submitting their bill to the client. By client I mean the contractors client not the umbrella company.

    The invoice from the supplier is £115 and this is the charge accepted by the contractor as a client of the hotel business and as such it is this amount which should be included in the contractors charges to the client, plus VAT at the prevailing rate.

    It may look odd but if I carry out an assignment for a client in December 2009 and incur a £115 cost in carrying it out I will include this £115 charge on my January invoice to the client and then add VAT of £20.12 (i.e. 17.5%). The fact that I might claim back the £15 VAT charged to me is irrelevant.

    What the client will not know is whether I am barred from claiming back for some reason and therefore will actually incur the gross cost. The contractor is free to assume the recovery when passing on the charge but that leaves them exposed if when doing the next VAT return they find that in fact they are not permitted to recover or if later on, in a compliance review, they find that the recovery has to be reversed. It is for this reason you would ignore the potential recovery, accept the charge, plus VAT and then pass this on to your client.

  • truecockney
    truecockney Registered Posts: 94 ? ? ?
    Sorry for the belated reply, but I think I am going to have to try and get some kind of HMRC judgement on this.

    PayrollPro, we are a self-billing agency so no matter what we receive in the way of invoices from our contractors, it is ignored (as per government legislation) so the onus is on us to get things right.

    Any way we attempt, we get queried (whether by the client/contractors accountants {"charging VAT on top of VAT"} or the contractor themselves {"getting less reimbursed less than I claimed"} or even "why aren't you charging VAT being a VAT registered business"). When contractors are either non-VAT registered or being paid through PAYE, there isn't a problem, but it is the lack of consistency or regulation for contractors operating as VAT registered businesses that means we are constantly having to question our judgement.

    Does anyone have any contact details of the people I need to speak to to get an HMRC judgement on this (either e-mail or phone number)?
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