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Why is VAT added when I rebill zero-rated expenses?
...is a common question we get here at FreeAgent Central.
The simple answer is that, most of the time the VAT rules require you to because they're part of your service - just part of the rich tapestry of value-added-tax economics.
In specific circumstances though, expenses can be treated as 'disbursements' and rebilled with no added VAT. This is where you pay money to some third party on behalf of your client and your client actually received the goods or services.
Normally, travelling and accommodation and admin expenses don't count as disbursements, since you made use of them rather than your client. Of course, if your client is another business they would just reclaim the VAT they paid on your services anyway, so neither of you lose out.
For the full rules, see the HMRC rules
here.
As always, consult your accountant if you have any queries. We know some friendly ones...
The simple answer is that, most of the time the VAT rules require you to because they're part of your service - just part of the rich tapestry of value-added-tax economics.
In specific circumstances though, expenses can be treated as 'disbursements' and rebilled with no added VAT. This is where you pay money to some third party on behalf of your client and your client actually received the goods or services.
Normally, travelling and accommodation and admin expenses don't count as disbursements, since you made use of them rather than your client. Of course, if your client is another business they would just reclaim the VAT they paid on your services anyway, so neither of you lose out.
For the full rules, see the HMRC rules
here.
As always, consult your accountant if you have any queries. We know some friendly ones...
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Inappropriate?That is probably one of the best answers to this question I have ever read. I couldn't have put it better myself and I'm a chartered accountant!
I’m happy
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Inappropriate?I agree - that is quite clear
However where do we input disbursements in freeagent so that they are not re-billed for VAT? -
Inappropriate?@aswl
You should rebill your expense as normal, then edit the resulting invoice item to show a VAT rate of 0%.
Drop me a line if you need more explanation, I'll be happy to walk you through it. -
Inappropriate?One point of contention I have with FreeAgent at the moment, though, is that it slaps VAT on any mileage I incur. This is despite my accountant repeatedly telling me VAT is not applicable on mileage I incur that I rebill to the customer. -
Inappropriate?I'm not sure your accountant is right. You agree with your customer that he/she will pay for the mileage expenses you incur at an agreed rate.
That forms part of the service you have performed, and is not a disbursement in the sense described above.
If you're VAT registered, you charge VAT on the services you perform, both the actual work you do and the expenses you incur, which your client is able to reclaim of course it they themselves are VAT registered.
If you agreed you'd charge mileage at 40p/mile _including_ VAT then that of course is different...
Any qualified accountant care to chip in on this? Stuart? I could be entirely wrong, which wouldn't be the first time ;-> -
Inappropriate?You're right Ed. there is an example in the VAT Guide http://customs.hmrc.gov.uk/channelsPo...
Example 3:
A consultant is instructed by the client to fly to Scotland to perform some work.
VAT treatment:
The consultant cannot treat the air fare as a disbursement for VAT purposes. The supply by the airline is a supply to the consultant, not to the client. The recovery of outlay by the consultant represents part of the overall value of the consultant’s supply of services to the client. The consultant must account for output tax on the full value of this supply.
An air fare doesn't have VAT added to it but when it is re-charged to a client it does.
I’m amazed at the way VAT works,
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Inappropriate?Stuart, Ed,
I certainly understand the rules for train and air travel - I've had plenty of those to contend with too - but I'm consistently told that the rules are different for mileage and that VAT shouldn't be charged.
I can't find any clear guidance from HMRC on this either. I have had two clients dispute past mileage claims with VAT on them that FreeAgent applied - seemingly they had consulted with their accountants, who had told them that VAT was also not applicable.
I'd love to get this one cleared up once and for all.
I’m confused
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Inappropriate?It will take a few weeks but leave it with me.
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Inappropriate?Just back from holiday and Sod's Law means that one of my client's didn't add VAT to mileage expenses but agency when they paid him treated mileage as VAT inclusive.
I'm going to sort this out once and for all!
I’m frustrated
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Inappropriate?I spoke with HMRC and they were absolutely worthless on the subject. The chap I spoke to could (would) offer no guidance at all, other than to say "you don't need to add VAT if it's a disbursement". I gave him a very specific example and he was unable to say whether it would count as a disbursement or not, which is extremely frustrating.
When I called back again a few days later to see if I got to speak to someone with a modicum of intelligence, I was told, and I quote, "There is no clear guidance on the subject - it's up to you, really." I asked if they were likely to pursue us for VAT if we simply treated it as a disbursement and he said they wouldn't.
Still, none the wiser...
Good luck with your investigations, Stuart - hopefully you'll have HMRC contacts who aren't working in a call centre on a few quid an hour.
I’m peeved with HRMC
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Inappropriate?No chance I still have to deal with the same contacts at the same call centres as you.
Believe it or not I have to put the question in writing and wait for a written reply!
I’m > peeved with HMRC
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Inappropriate?This extract from the HMRC website may help in the meantime (my use of bold )
You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:
1. You acted as the agent of your client when you paid the third party;
2. Your client actually received and used the goods or services provided by the third party ( this condition usually prevents the agent’s own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes ) -
Inappropriate?Ah, now you see that word "usually"...
One of the difficulties I have is that an awful lot of the mileage is where one of our clients has asked me to go see one of their clients... so I'm not entirely sure if that is classed as me acting on behalf of a client, making it a disbursement or if it's just "all part of the service".
I’m confuddled
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Inappropriate?I stand corrected I can now e-mail HMRC with my query. It takes up to 15 days for a reply.
It did take ten minutes on the phone to the call centre and a request to speak to a supervisor before I was "allowed" this information.
I’m really ****** *** with HMRC now!
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Inappropriate?Despite my e-mail being sent on 17 August 2009 ( 30 days ago) I have still not received a reply from HMRC. Hopefully my reminder will prompt a full reply in considerably less than 15 days.
I’m still ****** *** with HMRC!
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Inappropriate?This was quick wasn't it!
Thank you for your email dated 17 August 2009, regarding the VAT treatment of mileage costs.
You have asked if VAT must be added to any mileage costs reclaimed from a client when it is itemised separately on the invoice.
Firstly, I would point out that the sub-paragraph you refer to in The VAT Guide, 25.1.3, gives examples of supplies that cannot be treated as disbursements, and concludes each example with a confirmation that VAT is due on the full value of the supply.
However, in respect of the recovery of costs from a client, these would always be taxable unless they were third party payments made by you, and therefore treated as disbursements. Mileage costs are something that you will have incurred and which you wish to recover. They are therefore always taxable as they are not a service received by your client.
I’m sure this is the answer if you understand it!
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Inappropriate?Stuart,
Thanks so much for this - that's the definitive answer I've been looking for. I guess I can't really back-date any expense claims I've already made of clients but I'll have to let them know now that VAT is applicable after all and I'll be applying it going forward.
Thanks again, Stuart.
I’m thankful
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Inappropriate?Oh, and apologies to you, Ed, for ever questioning the calculations behind FreeAgent.
I’m disappointed in myself
EMPLOYEE
