VAT and expenses

[Bumbling Amateur]

I've recently become VAT registered in the Flat Rate Scheme. My first invoice as a VAT registered business includes some expenses - taxis, postage and a Skype subscription which ordinarily I would charge to my client at the cost I pay for it.

Let's say a taxi charged me £9.60. His receipt has a VAT number on it. Before I became VAT registered I would submit an expense form detailing this expense and add £9.60 to my invoice.

Now what do I do? And how would I deal with the Skype and postage expenses which I believe are zero rated.

 

[Scalloway]

VAT: costs or disbursements passed to customers

https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

 

[Bumbling Amateur]

VAT: costs or disbursements passed to customers

https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers

Thanks that is pretty clear. Although...

For my taxi example the taxi driver will probably claim back the VAT component of his £9.60 charge ie £1.60. I will then add £9.60 + £1.92 VAT (£11.52) to my invoice. My client will receive my invoice and reclaim the £1.92 and charge their client £11.52 + £2.30 VAT and they will reclaim the £2.30. So the government gets £1.92 from me and everyone else wastes a ton of time on admin. What am I not understanding?

I read on an accounting forum a response where someone said that, using my example, I could charge either £8 + £1.60 VAT or £9.60 + £1.92 VAT. Is that true?

 

[Scalloway]

So the government gets £1.92 from me and everyone else wastes a ton of time on admin. What am I not understanding?

That is how VAT works. It gets added on at each stage of the process until the ultimate consumer pays it and doesn't reclaim anything.

I read on an accounting forum a response where someone said that, using my example, I could charge either £8 + £1.60 VAT or £9.60 + £1.92 VAT. Is that true?

See here

https://www.gov.uk/guidance/vat-cos...-disbursements-and-recharges-on-your-invoices

 

[TheCyclingProgrammer]

It’s up to you what you choose to recharge your customers for any costs incurred (and may depend on any contractual agreement).

Whatever you charge, you must add VAT to, unless it’s a disbursement, and from the sounds of it the costs are not a disbursement.

If you’ve agreed to recharge any expenses at cost price, then as you’re VAT registered you will probably find that most clients expect you to recharge any expenses at net cost so that when you add your VAT it matches the original transaction and your input and output VAT costs cancel each other out (it’s VAT neutral for you and your client).

As you’re on the flat rate scheme you can’t directly reclaim the VAT so you could argue that you should recharge the gross amount (and add your VAT on top of this) but I’d counter that with the argument that the flat rate scheme has a built in surplus that is intended to cover any input VAT costs already and that you shouldn’t need to pass the input VAT cost on to your client.

With that said, if you’re client is happy to be recharged at gross cost then there’s nothing stopping you. HMRC doesn’t make any rules about what you must or must not recharge customers (except for disbursements as mentioned above).