Expenses and the FRS

[Silvertop]

Hope I've not missed the answer to this in some other area - I'm registered under the FRS and in the course of my business I travel to a client's place of business and pay directly for hotels and subsistence while I'm there.
On my expenses invoice I then charge the client the amount I've paid plus VAT, so for instance if my hotel bill is £85.11 + VAT, I hand over £100 and charge my client £117.50. I then pay the VAT man 12.5% of the £117.50
Now for the question - is this the right way of going about things? My client's accounts department have suddenly said that I can't charge VAT on VAT and in the case of the above example my expense invoice will now have to show £100 as the full amount. If I then pay the VAT man 12.5% of the gross amount, I'll end up with £87.50 available to cover my £100 expense.
Have I been "getting away with it", or have I been doing it right?
Please be gentle.....

[QwertyBerty]

Expenses aren't a sale. You paid £100 to stay in a hotel and you got £100 back off your client.

As you're on FRS you can't reclaim the VAT.

QB.

[malvolio]

WHS - but your client is wrong, you can (and should) charge VAT on VAT-inclusive expenses since you incur the expense as part of providing a value-added service (which is what VAT is all about). It ends up revenue neutral anyway for the various intermediate VAT-registered companies.

[blacjac]

It can be a bit difficult to explain to some accounts departments.....

You are not actually claiming any expenses from your client, you are charging them extra for your services, to cover the cost of any expenses you have inurred.
And as you are charging them extra, this charge must be plus VAT under law.

[VectraMan]

WTS - but it is a sale, it's part of the money you charge your client for your service. So you have to add VAT onto whatever you charge.

You might lose out by being on the FRS, but that's the gamble you take with the FRS: that the amount you lose by not being able to reclaim VAT is outweighed by the amount you gain. It shouldn't affect the way you charge the client.

[THEPUMA]

This is actually a complex anomaly which I think very few people on the FRS understand.

I think there are 2 perspectives on it. The first is that you shouldn't be financially disadvantaged because you incur expenses on behalf of your client, in which case you should charge VAT on VAT.

The second is that you normally benefit financially from being on the FRS so why should your client be financially disadvantaged because you have chosen to be on it. Therefore you charge VAT once only and accept that whenever you incur an expense, the profit on the flat rate scheme is reduced.

I have explained this to clients on a number of occasions and in the overwhelming majority of cases, they have decided that the goodwill with their client is more important than a modest VAT loss and therefore only charge VAT once.

Sometimes you have no option if the agency/client have a policy on the matter, which seems to be the case in this instance.

[blacjac]

Don't mean to be disprespectful THEPUMA as I know you are an accountant.

However my accountant has told me that you are not claiming expenses from the client, you can ONLY do that from your employer.

The fact that your employer has an agreement to recharge expenses to the client means that that recharge becomes a sale of services and is subject to VAT.

[THEPUMA]

Don't mean to be disprespectful THEPUMA as I know you are an accountant.

However my accountant has told me that you are not claiming expenses from the client, you can ONLY do that from your employer.

The fact that your employer has an agreement to recharge expenses to the client means that that recharge becomes a sale of services and is subject to VAT.

Hi Blacjac

That is correct. You certainly have to charge your client VAT on your expenses if your underlying services are VATable. The question is, if I incur a hotel expense of £100 + VAT, should I recharge my client £100 + VAT = £117.50 or (£100 + VAT) + VAT = £138.06?

PUMA

[Silvertop]

There seem to be a bias towards presenting these expenses to my client as an additional charge rather than a simple business expense and I will approach them with this argument.

I appreciate the 2 perspectives which are the horns of this particular dilemma, and if they really dig their heels in then for the sake of goodwill I'll give it up, however in addition to the tack above I'll claim precedence because they've been OK about it for the past 18 months.

In mitigation of the 2nd perspective though, isn't the reduced amount I pay to HMCE paid for by the reduction in paperwork that they have to process every quarter? This is an "arrangement" between me and HMCE and doesn't really belong in any argument from the client which is based on whether I'm advantaged or disadvantaged by being on the FRS.

Thanks for the replies.

[VectraMan]

That is correct. You certainly have to charge your client VAT on your expenses if your underlying services are VATable. The question is, if I incur a hotel expense of £100 + VAT, should I recharge my client £100 + VAT = £117.50 or (£100 + VAT) + VAT = £138.06?

I think the key thing here is that reimbursing expenses is a private arrangement between yourco and the client. There's no reason why you couldn't have a deal where they only reimbursed 50%, or if they didn't require receipts you could get away with charging them double. It's not an accounting issue, it's a customer relations issue, and as Mr. The Puma says, it might be better not to argue and accept the small loss rather than be seen to be trying it on.