On occasions your client will agree to reimburse some expenses that you have incurred.
Claiming back the expenses
You will need to charge any agreed expenses on your invoice to the client.
The amount you charge will vary, depending on whether your company is VAT registered.
If you are not VAT registered:
Add the expenses to your normal rate and invoice for the total.
Some of the expenses may include VAT. You will need to charge the client for the total VAT inclusive amount, since you are not VAT registered.
VAT is not recoverable by you and should be reimbursed to you fully by the client.
If you are VAT registered:
For expenses including VAT, you will be able to recover the input (purchase) VAT on your own VAT return.
Only invoice the client for the net (excluding VAT) expenses, plus your normal fees.
You then add VAT to the total of your fees and net expenses.
The client then pays the VAT on the expenses once (i.e. to your company) and will be able to recover that VAT in their own VAT return.
A common mistake is to charge the client for the VAT inclusive expenses and then add VAT again to the total of those VAT expenses. Most clients will object to this and require the invoice to be resubmitted on the correct basis.
Bookkeeping and tax issues
The expenses you charge and recover from your client should be recorded in your accounts records in the same category as “income received”. When the expenses are reimbursed to you, you should record those expenses to the usual categories, e.g. travel, subsistence etc., in your accounts records.
The expenses that you are reimbursed, may not necessarily be the same as those charged to the client (there may be a profit element) and any surplus/deficit will affect the company’s corporation tax profit.
At the end of each tax year, you (or your accountant) will need to prepare a form P11D to disclose to HMRC any expenses that you have been reimbursed by the company.
The figures to be disclosed on the form P11D need to include all expenses reimbursed to you, whether or not they have been recovered from the client and should include VAT.
If your contract is caught by IR35, then the expenses reclaimed will form part of the company turnover and will have a marginal benefit when calculating the 5% deduction for administration costs. In this calculation, the actual expenses incurred will be considered a direct cost and as such, are fully deductible in the deemed salary calculation.