If you’re VAT registered and your customer agrees to pay for your expense costs (e.g. travel, food, mileage) there is a common mistake that businesses make when invoicing their customers.
Example
You need to bill a client for your time plus travelling/food expenses.
Your hourly rate is £100/hour and you have worked for 8 hours.
You caught a train for £50 (there is no VAT on train tickets) to the customer’s premises.
You bought lunch for £12 (£2 VAT) whilst visiting the customer.
The customer has agreed to pay for your hourly rate plus expenses.
Common Mistake
Many people will invoice their clients and not include VAT on the expense that has no VAT on it, shown below:
Consultancy = £800 + £160 VAT = £960
Train Ticket = £50 + £0 VAT = £50
Lunch = £10 + £2 VAT = £12
Total = £860 Net + £162 VAT = £1,022 Gross
Correct Way To Invoice
This is however incorrect as VAT should be added to the whole invoice, shown below:
Consultancy = £800 + £160 VAT = £960
Train Ticket = £50 + £10 VAT = £60
Lunch = £10 + £2 VAT = £12
Total = £860 Net + £172 VAT = £1,032 Gross
On rare occasions customers may be able to treat expenses as ‘disbursements’. When you make payments on behalf of your customers, for goods or services received and used by them, you might be able to treat these payments as ‘disbursements’ for VAT purposes. This means that you don’t charge VAT on them when you invoice your customer.
For example: a website design consultant agrees to purchase a website hosting package from another company on behalf of the client - click here for more details.