How Does VAT on Expenses Impact Your Business

VAT on Expenses is defined as what you charge a customer for items you bought or activities you or your employees undertook to do the work the client has hired you to do. It sounds complicated, so let’s break it down a bit more.

When you run a company that relies on extensive travel or charges a set fee for a service or project, like an estate agent, you would invoice your customer for the fixed fee plus any expenses incurred while doing the job.

For example: You are an engineering firm specialising in maintaining a very specific type of equipment for companies all over the country or the world. When your customer experiences a breakdown or requires your services, your engineer will have to fly or drive to their location, stay in a nearby hotel, rent a car, and eat three meals a day. These costs are additional to the service provided but are charged to the customer as part of the value added by your company.

Quick note: If you have a valid VAT claimable expense and did not pay VAT on purchasing that expense, such as a zero-rated item or service, you still charge VAT to the customer.

Identifying VAT Claimable Expenses

It’s worth understanding exactly which expenses you can charge VAT on to your client. This list, while not exhaustive, gives you a good idea of what you need to consider when reclaiming VAT on expenses:

Business-related Purchases

These are considered to be any costs you, your employees, or your company, may have incurred while doing business for a customer. Some examples of business-related VAT expenses include: postage costs, delivery costs, bank fees, some entertainment expenses (not all), and mobile phone calls that are directly connected to business activities.

Some of these expenses fall into a grey area between personal and business use, so remember, the golden rule is you can only charge VAT on expenses incurred for the company.

Services and Utilities

If your business needs to rent out specific facilities or pay for certain utilities while providing a specific service to a customer, then these are claimable as VAT on expenses. However, if you provide your services from your offices, these are not billable as VAT on expenses, as these costs would form part of your project fee or billable hours.

Travel and Accommodation

When you need to travel to a customer, you need to include costs around fuel, plane tickets, transport at the destination, accommodation, and food. These costs are all incurred on behalf of the business for the customer and are eligible for VAT on expenses. If there is a lot of local travel, you can reimburse employees based on their mileage at an agreed rate with the customer.

Subscriptions and Memberships

Suppose your employees have subscriptions to trade or professional journals or need to be members of professional organisations. Each of these cases are directly related to your business and your employee’s ability to do their jobs. This means you can claim VAT on these expenses. However, this does not count if the monies paid are to sporting clubs, gyms, political parties or charities, as these are defined as personal expenses, not VAT on expenses to your customer.

Training and Education

Lectures, conferences, workshops, training, continuous professional development (CPD), and seminars – all of these your employees with relevant skills development and help them better deliver their services to your company. Some types of training are exempt from VAT, others are not. It depends on whether the training is a government-approved or funded training scheme (VAT exempt) or if it is partly funded (you pay VAT on your share of the cost), or if it is completely paid for by the company (subject to VAT). 

The difference between disbursements and expenses

There is a difference between an expense that adds value to the service you provide to your customer and a disbursement. A VAT billable expense adds value to the customer and the service you provide, a disbursement does not.

A disbursement is a service, solution or product that doesn’t add value and is paid on behalf of the customer by your company.

Let’s dig a bit deeper…

A disbursement is an item purchased on behalf of your client, so you cannot claim VAT on this item, even if you paid VAT to purchase it. These items will need to be listed separately on your invoice to your customers so they can see which items are VAT inclusive and which are disbursements.

A great way to explain this is – if you pay for your client to fly to your offices, then this is a disbursement, if you pay for your employee to fly to your client’s offices, this is a VAT on expenses.

Simply put – if you spend money to provide your customer with a service, then you need to charge VAT on these expenses. If there are costs that you incurred as part of your service to the client, then it’s a disbursement, and you cannot charge VAT.

The Process of Adding VAT to Expenses

Now that you know which items and services allow you to add VAT to your expenses, you need to know how to add these items and services to your invoices. Follow these steps below:

Wait! Before you start: Take the time to collate, store and digitise all your paperwork to complete your VAT returns effectively at the end of each month and provide your customers with detailed invoices that include proof of payment and services provided. Use a trusted accounting platform to scan, manage, and store all your slips and receipts, as these will come in handy for both clients and HMRC.

Step 1: List all VAT-inclusive items in one section of your invoice. If you have an accounting platform, it should add these in the correct order automatically.

Step 2: Collate all the information to ensure everything is included and VAT has been added correctly.

Step 3: Add in all the items that count as disbursements and ensure that no VAT has been added to these purchases. Then check that these are correct and that none should be charged VAT.

Step 4: Claim back VAT on the items you paid for by following the step-by-step guide to VAT payments online.

Tips for Managing VAT on Expenses

Want to make VAT on expenses a lot easier and more manageable? This list will help you manage your expenses and your VAT:

Invest in a trusted technology platform that can automate invoicing, detect VAT-related expenses, and alert you to any potential errors. It’s worth investing in a solution that can detect any VAT expenses you may have missed and offers insights into how different VAT expenses are affected depending on location and use case.

Make paperwork and record-keeping a priority. Every item, invoice, receipt, mileage counter and expense should be collated, digitised and stored in a central space that’s clearly labelled and easily accessed. While this may take time to set up initially, once you have the system in place, your employees can quickly and easily upload expenses, and you have a comprehensive digital record.

Ensure everyone who works for your company knows your policies regarding expenses that will be paid out, which are counted as disbursements, and which will be charged to the customer. This avoids problems and keeps everyone on the same page.

Ready to Master VAT on Expenses? Equip Your Business Today!

Now you know what you can charge back in VAT expenses to your customer and what you cannot, and how to tie all these threads together to ensure your business is managing VAT correctly and compliantly.

Ready to master VAT on expenses? Blue dot provides a comprehensive, precise and transparent technology platform that helps you manage your VAT effortlessly. For starters, the Blue dot VAT calculator helps you find the VAT hidden in your employee spend based on your region. You can use this calculator to work out your VAT and discover what you can claim back in just five easy steps. And you will likely find VAT expenses you didn’t know you had!

Blue dot is designed to help you make your VAT compliance easy and efficient.