How do you record all the expenses you charge and recover from your client?
So for example Mrs.X's client has agreed to reimburse her travel expenses, therefore Mrs.X invoice shows £100 for her service and £50 for her train ticket plus vat as Mrs.X is vat registered. She gives the train receipt to her client and retains a copy for her own records.
My question is what is the proper way of recording the above transaction?
I've already had a discussion with Pauline on this one (thank you Pauline), but still not 100% sure, just the way my client puts it into his books doesn't make sense to me.
This does not sound like a disbursement, so I would record the train fare as a normal expense (Travel Costs?) and claim the VAT. As your client will be charging her customer VAT, add the cost less VAT into the invoice charge to their customer. then add VAT to the total. This will result in a £150 invoice plus VAT.
It effectively becomes an income, cancelled by the expense. It will also increase the sales turnover.
As the train fare receipt belongs to your client, your client should keep the original train ticket/ receipt. If their customer requires proof of the expense then give them a copy making it clear that it not an invoice/ receipt for them to use.
HTH
Bill
-- Edited by Wella on Friday 17th of June 2011 12:02:51 PM
Thank you Wella, this is what I would do, but my client's way of doing this is different, she invoices her client for £150 and then attaches a copy of the train receipt to the back of the invoice and puts £100 as an income (sage code 4xxx) and £50 as an expense (sage 6xxx).
You might want to point them to HMRC website for more info.
Below is an extract of an HMRC example from the website. What your client has is a recharge of costs, not a disbursement (The travel was supplied to your client, not their customer)
Showing disbursements and recharges on your invoices
If you exclude disbursements from the VAT calculation then you must itemise them separately on your invoices. You might also decide to itemise any incidental costs you recharge to your customers, but that's up to you.
An example of an invoice showing disbursements and recharges
A website design consultant based in London does a week's work for a client in Edinburgh. The consultant visits the client's premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.
The basic fee agreed between the consultant and their client for the work is £2,500 plus VAT. It's also agreed that the client will pay the cost of the consultant's travelling expenses, which come to £300. The cost of the website hosting package purchased on the client's behalf is £150.
The £300 travel cost that the consultant recharges to the client is not a disbursement. The consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:
it was purchased for the use of the client
the client agreed that the consultant would arrange and pay for it on their behalf - this means the consultant agreed to act as the client's agent
the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
it was the client's responsibility to pay for the goods
the consultant had permission from his client to make the payment
the client knew the web hosting package was from another supplier and not from the consultant
the consultant showed the costs separately in the invoice
the web hosting package paid for by the consultant is additional to the other services being billed to the client
The consultant's invoice to their client for this work might include the following items:
I charge one of my clients a small amount of expenses every few months, I do it the way Bill does it and it works fine. As he says one cancels out the other but it is potentially income then cancelled out by expenses when the receipt is put on the expenses. Hope that makes sense.
Hi there, I was also advised by accounant to do it the way Aleksandra did it, so that the income stays as £100 and the expense as £50, so that when you input the other 50 expense (your payment) as a payment then they will zero off. But I do not think that I was able to claim the VAT on the train fare as that is a zero rated item. I then had to charge VAT on the full amount. It may be worth checking out with your accountant, any more thoughts on this would be great. Thanks Julie
-- Edited by Julie Hall on Saturday 18th of June 2011 07:15:43 AM
You are correct, if you recharge the expenses, you do add VAT, even though it was zero rated to you. (the same as if you recharge postage, no VAT on the stamp until you recharge it)
The main consideration is, who received the goods. In this case it is Aleksandra's client who receives the benefit. She travelled to be able to perform her services.
If she had bought the ticket to give to her client to use in their business, then it would have been shown on the invoice after the £100 +VAT at £50
Thanks Bill, but was I correct in thinking that the payment (i.e. orginal train ticket purchased) would be processed throught the accounts as zero rated.
Yes, basically all transport tickets are zero rated within the UK (there some exceptions but generally). You still need normal VAT evidence, even though there is no VAT to pay. Suppose it's to show that it is zero rated, rather than standard.
It only gets VAT added, if it's recharged
HTH
Bill
-- Edited by Wella on Saturday 18th of June 2011 01:33:48 PM
Hi there, yes that is what I do, not sure what software you are using, but when raise sales invoice in sage for example (but double entry principles the same) it will debit debtor control account £180, credit the Sales VAT £30, Credit the Sales £150, then when payment is received from customer, the debtors account is credited £180 with the debit entry in the bank account. Yes the payment for Train would be debit for example travelling expenses (zero rated VAT) and credit the bank account. Hope this helps. Julie
gs to your client, your client should keep the original train ticket/ receipt. If their customer requires proof of the expense then give them a copy making it clear that it not an invoice/ receipt for them to use.
HTH
Bill
-- Edited by Wella on Friday 17th of June 2011 12:02:51 PM
I have spoken to my client and she said she can't keep the original receipts, because she's agreed to give them to her client and she's not going to change that ...
Typically this is something I read some time ago, and now cannot find the appropriate manual, or notice, where I saw it written that an invoice must be an original, not a copy.
I have scanned through VAT 700, and notice 700/21 but I can't find it there.
However, I would still strongly advise your client to keep the originals, as they are processing the VAT, as inputs. If you think about it, it is possible that your clients client, could try to reclaim the VAT if the expense was not an exempt item, if they had an original VAT invoice.
Would your client's client not accept a photocopy?
If not, then how about sending the original and asking for them to make a copy and then return the original to your client, because you need it to support your own VAT reclaim.
If you think about it, it is possible that your clients client, could try to reclaim the VAT if the expense was not an exempt item, if they had an original VAT invoice.
Bill
Well, I am afraid you may be right there ... But what can I do? I have given advice to my client that she should keep originals but I can not force her to do it ...
I know these situations are a dilemma. As you say, you can only advise you client of the position.
I think I would probably put it in writing, that you advise keeping the originals, as a copy may not be acceptible to HMRC for VAT purposes, and may result in any claimed amounts being disallowed.
That way at least your client can't say she wasn't warned.
There's a detailed discussion on this very topic on the law society site in relation to solicitor's outlays and disbursements. Same principles apply here:
Interesting to note that the Law Society's view is that HMRC's interpretation is incorrect on some aspect of what defines a dispursement in paragraph 25 of the VAT700 guide, and point out that VAT700 is only a guide!
