A Guide to Invoicing for Expenses

As a contractor, you can incur expenses to clients during the course of work and through any goods you purchase. Expenses and disbursements are treated differently to tax and VAT and should be invoiced as such.

Invoicing for expenses

If your client reimburses your company for expenses incurred whilst undergoing your duties, these must be invoiced for using one of the following three methods:

Adding on VAT

This is the simplest method and is accepted by most agencies and clients. By using this method you will have to charge VAT in the expenses involved whether you pay VAT on them or not.

Example:

The invoice issued by your company was for £10,000 net and also incurred hotel costs of £120 (including VAT) which your client has agreed to reimburse your company for. On the invoice, you would simply show the expense of £120 with VAT added on at correct rate (currently 20%).

Work done: £10,000.00

Expenses: £120.00

Net Invoice: £10,120.00

VAT at 20%: £2,024.00 (£2,000 VAT on work done and £24 on hotel expenses)

Gross Invoice: £12,144.00

Splitting out VAT

If your client or agency does not accept the first method of invoicing your expenses, you will have to split the VAT element out of the expenses.

Example:

The invoice issued by your company was for £10,000 net and also incurred hotel costs of £120 (including VAT) which your client has agreed to reimburse your company but will not allow the cost of additional VAT to be added.

Work done: £10,000.00

Expenses: £100.00 (£120 hotel costs less 20% VAT)

Net Invoice: £10,100.00

VAT at 20%: £2,020.00 (£2,000 VAT on work done and £20 on hotel expenses)

Gross Invoice: £12,120.00

Invoicing for disbursements

If you pay suppliers on behalf of your customer and pass the cost to your customers when you invoice them for expenses, you may be able to leave these payments from the VAT calculation. In this situation, it is the customer, not you who buys and receives the goods or services and you are acting as their agent. This type of payment is known as a ‘disbursement’ for VAT purposes. If you have incurred a cost that qualifies as a disbursement, the expense must be charged as a separate item on the invoice.

Before you treat a payment as a disbursement for VAT purposes, you will need to make sure that all of the following apply:

You paid the supplier on the customer’s behalf and acted as the agent of your customer
Your customer received, used, or had the benefit of the goods or services which you paid for on their behalf
It was your customer’s responsibility to pay for the goods or services
You had your customer’s permission to make the payment
Your customer knew that the goods or services were from another supplier, not you
You outline the costs separately on your invoice
You pass the exact amount to each customer when you invoice them
The goods and services you paid for are additional to the amount you are billing the customer for doing yourself

It is usually only an advantage to treat the payment as a disbursement for VAT purposes if the supplier did not charge VAT on it, or if the customer cannot reclaim the VAT.

Example:

The invoice issued by your company was for £10,000 net, and it also showed incurred hotel costs of £120 (including VAT) and also a purchased a website domain on behalf of the client for £150.

Work done: £10,000.00

Expenses: £120.00

Net Invoice: £10,120.00

VAT at 20%: £2,024.00 (£2,000 VAT on work done and £24 on hotel expenses)

Disbursement: £150.00

Gross Invoice: £12,294.00