A recharge expense is one that is incurred in the process of performing one’s services, but has been agreed to be paid for by the client. A disbursement, on the other hand is an expense which you have paid on behalf of the client. A receipt for a disbursement will always be in the client’s name, and a receipt for a recharge expense should always be in the claimant’s name.
But once you start billing clients and paying contractor’s their expenses, it gets a little more complicated because we have to understand where the VAT is going.
Recharge Expense
Lets take a look at a £120 recharge expense incurred by contractor John who is VAT registered. His expense includes 20% VAT. This is a recharge expense, so it is an expense that he has incurred during the course of his business, but the client has agreed to pay it back. Since John can claim VAT, the actual expense he incurred is the net amount £100. So he should charge his client £100 NET and apply his own VAT on top, in this case 20% again. John incurred £100 net, and got back £100 net. He charged his client £20 VAT, and his client claimed back £20 VAT, and paid £100 net.
Lets see what happens when John incurs a recharge expense of £120 which is non-VAT, for example a railway ticket. In this case, John is not able to claim any VAT, so his NET expense incurred was £120. When he adds this to his invoice to his client, the NET item value is £120, so he must apply 20% VAT on top of that since he is VAT registered. This means he ends up billing his client £144. He incurs £120 NET and receives £120 NET back from the client. John charges £24 VAT to his client, and his client claims £24 VAT back from HMRC.
What if Susy, who is not VAT registered, incurs the same VAT expense for £120? She can’t claim any VAT, so regardless of whether the expense has VAT applied not, she always incurs an expense of £120. She can’t charge VAT on her invoices either, so she only ever charges £120 back to the client. Therefore it is in the client’s best interests for their contractors to be VAT registered, because they end up paying the VAT bill.
Disbursements
So what about disbursements? Well this is like an I owe you. The expense claimant cannot claim VAT on this because its not their expense. They should really provide the client with the original receipts which are in their client’s name, and the client claims the VAT back on the expense themselves. In terms of invoicing the client for their disbursements, there should be no VAT applied on those line items, because it is simply an ‘I owe you’.
Disclaimer
I am not a qualified tax specialist, but I run a pay and billing system Timesheet Portal which is used by many recruitment agencies. At Timesheet Portal we have developed modules which take into account reimbursable and rechargeable expenses for self billing and client billing. Before taking our advice, you should do your own research and consult a tax advisor or account to ensure your processes are compliant with local tax laws. If you are a recruitment agency and want to simplify your pay and billing processes, why not sign up for a free online timesheets trial on our website and see how painless it can be!