Charging expenses back to your client

Many contracts allow for some or all expenses incurred to be charged back to the client; it’s a convenient way for the IT contractor to insure themselves against the possibility of unexpected additional expenditure during the contract’s execution.  However, it’s important to be aware that there are subtle distinctions between different types of expenses and that these can have significant implications, in particular for VAT.

Expenses incurred over the course of an IT contract tend to fall into one of two categories: charges that are incurred by you or your limited company in the course of discharging your contractual responsibilities (commonly including travel and subsistence, postage, phone calls etc.); and charges that are incurred by your client but which you pay on their behalf (for example, the purchase of a piece of software or an Internet domain name that will at the end of the contract remain in the client’s possession). 

This distinction – whether you/your IT contractor company or your client is the final recipient of the service or goods being paid for – determines what options you have for charging the expense back to your client.

Scenario 1: The expense was part of your ‘core service’

This covers expenditure where you/your company is the final recipient of the service or goods being purchased.  Examples might include:

-travel, accommodation and subsistence for visits to your client’s site;

-business phone calls;

-postage or other administrative costs;

-bank charges, for example for transferring funds to your client.

Invoicing this sort of expense is relatively straightforward.  If you are VAT registered, you must charge VAT on these items (even if they were originally free of VAT) as they are part of the service that you are providing to your client.  Whether you itemise these expenses separately on your invoice should be agreed between you and the client (it is good practice to do so), but a word of warning – do not agree to use your client’s internal expenses claim form, as this can leave you vulnerable to IR35.  Also, whether you itemise core expenses separately or not, be careful that the values that appear on the invoice are net of VAT – otherwise, when you come to add VAT to the combined subtotal of services and expenses, your client may find that they are being charged VAT a second time on these items.  If you are not VAT registered, simply invoice the full value of the expense including any VAT.

Make copies of all your receipts – even though they relate to your company’s outgoings, your client is likely to want to see them, and may insist on retaining the originals.

Scenario 2: The expense was incurred on behalf of your client

This scenario can usually be identified by a simple test – could the end result of the expenditure (i.e. your client receiving goods or services) have been achieved without your involvement?  If the answer is ‘yes’, then it is likely that you have acted as an agent or middle-man rather than as the final recipient of the benefit of the expenditure.  In this case, you may have the option to treat the expense as what the Revenue calls a disbursement and to exclude it from your VAT calculation when you invoice.  Some examples might include:

-software purchased by you that will be installed at your client’s site and become their property;

-a web hosting contract that you arrange and pay for on behalf of your client;

-purchase of a domain name for use by your client.

If you have a business expense and are unsure whether it might qualify as a disbursement HMRC provide an eight point check-list which you can use to assess the expense.

Once an expense is identified as a candidate for disbursement, you have the option to exclude it from VAT by adding it to your invoice after VAT has been calculated on the subtotal of services and core expenses.  Note that this is obviously only an advantage if you did not pay VAT on the original purchase.

Further details on charging expenses of both types back to your client, including a worked example showing both core expenses and a disbursement, can be found on the HMRC website.

Doug Brett-Matthewson

 

Editor's note: Further reading - IT contractor expenses and travel expenses