How to charge contracting expenses and disbursements back to your client

Alliance Accountants

Contractors often incur expenses when delivering their services to clients, and some may also purchase goods and services on behalf of their clients. These expenses and Disbursements are treated differently for tax and VAT purposes and must be invoiced accordingly.

“Expenses such as postage, travel and subsistence are costs included in the services a contractor supplies to their client,” explains Clare Rickman of contractor accountant InTouch. “Disbursements are purchases made by a contractor on behalf of their client.”

HMRC’s guidance offers the examples of a solicitor paying stamp duty on a client’s behalf, or a funeral director buying flowers for a client to distinguish disbursements from expenses.

How expenses and disbursements are different

According to Rickman, an expense is a cost a business incurs in the process of providing services. This is different from a disbursement, which is when a contractor, acting as an agent, makes a purchase on behalf of their client from a third party

Disbursements are purchases made by a contractor on behalf of their client

Clare Rickman, InTouch

“Contractors incurring necessary travel expenses to travel to the client’s site are incurring this expense as part of the service they deliver to their client,” continues Rickman.

“In contrast, if a contractor buys a web domain and hosting for a client from a third-party internet service provider as part of a broader web design project, the contractor is acting as an agent on behalf of the client. The client is benefitting from the purchase and is responsible for payment, and the costs are distinct from the contractor’s web design services.”

When the contractor charges on this type of cost, it should be treated as a disbursement.

Invoicing for expenses

“When contractors invoice for expenses, they should reclaim the VAT from the expense, add it to their invoice alongside fees for services and then charge VAT on the total,” says Rickman.

She provides an example: if a contractor on £500 per day delivers two days of their services to a client at one of its distant sites, and incurs a night in a hotel that costs £120, the contractor would invoice as follows:

  • Fees: two days at £500 per day = £1,000
  • Hotel: one night at £120 per night, less VAT at 20% = £100
  • Invoice total less VAT: £1,100
  • Add VAT at 20% = £220.
  • Invoice total = £1,320.

For expenses that are zero rated for VAT, such as rail fares and flights, a contractor simply adds them in. If the above scenario included a rail fare of £150, the invoice calculation would be as follows:

  • Fees: two days at £500 per day = £1,000
  • Hotel: one night at £120 per night, less VAT at 20% = £100
  • Rail fare: £150, which is zero rated for VAT, so the total remains at £150
  • Invoice total less VAT: £1,250
  • Add VAT at 20% = £250.
  • Invoice total = £1,500.

Invoicing for disbursements

If a contractor has incurred a cost that qualifies as a disbursement, they must treat the expense as a separate item on their invoice. Rickman explains: “A contractor would charge their fees as normal, and add VAT. Then they would add the full cost of the disbursement, including any original VAT, as a separate item on the invoice which has no further VAT added.”

She provides a further example: if a contractor on £500 per day delivers two days of their web design and copywriting services and buys a domain name and hosting for £600, the invoice calculation would be as follows:

  • Fees: two days at £500 per day = £1,000
  • Plus VAT at 20% - £1,200
  • Then the domain name and hosting costs = £600. VAT is not reclaimed for this cost, nor is it added to the contractor’s invoice
  • Invoice total £1,200 plus £600 = £1,800.

“It is important that the contractor clearly differentiates the disbursement so that it does not become part of the calculations for their VAT return,” adds Rickman.

Contractors on the flat rate scheme (FRS) for VAT must still adopt the above processes, and any disbursements are not considered to form part of their ‘vatable’ turnover when performing FRS calculations.

However, Rickman urges contractors using FRS who have high levels of expenses to review their FRS status, as it may be more financially beneficial to pay VAT on the total value of sales.


Alliance Accountants

Published: Thursday, February 14, 2013

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