How do I charge expenses or disbursements back to my end client?

It’s not uncommon that contractors and freelancers will charge their client for expenses and/or disbursements. When they do, this will naturally bring other questions, like how do I account for this in my bookkeeping? What are the corporation tax and VAT implications? What’s the difference between an expense and disbursement? In this FAQ blog, we’ll answer all of these and more…

How do I account for expenses I have incurred that my client has agreed to reimburse as part of my contract?

Within your contract, you may be allowed to charge back some of the expenditure you incur, such as travel and subsistence, back to your client. In this scenario, this is fairly straightforward as you will need to add this as a line on your invoice to effectively charge these costs back.

However, what do you do when it comes to VAT? If you are non-VAT registered, you will put the total expense amount on the invoice (e.g. a £120 expense that includes £20 VAT, would still go onto your invoice as £120). However, if you are VAT registered, you can still reclaim the VAT in your VAT return, but on the sales invoice you would put the net amount (i.e. £100) as the line total, and then add 20% VAT to the total invoice as normal (so ultimately you are invoicing £120, including £20 VAT). This is to prevent you from effectively double-charging your client VAT. 

What if I purchase goods or services on behalf of my end client?‍

If you are purchasing goods or services on behalf of your end client that they’ve agreed to repay, such as buying a domain name that they will be the recipient of, these would be classed as disbursements. In these scenarios, you’re effectively acting as an agent for your end client to purchase the goods/services from an end client. If you’re unsure, HMRC has a list of 8 conditions (linked here) that help determine what should be recognised as a disbursement.

The difference between disbursements and expenses is worth explaining, as they’re treated differently from a VAT perspective if you’re VAT registered. For disbursements, you would include these on your invoice as a separate line item including the full amount (even if it includes VAT), but importantly you would not charge VAT on top of the total, as disbursements are outside the scope of VAT. For example, if you incurred a disbursement for £100, regardless of whether this includes VAT or not, you wouldn’t then charge VAT on top of this line item to your client on the invoice. If you’re a Mighty user, you can record this line item as “Outside the Scope of VAT”.

What are the corporation tax implications?

Both expenses and disbursements will be included on your invoices and recognised as income for the company, as such it will form part of your profit that is subject to corporation tax. However, your taxable profits will also be reduced by the expenses you incur, so usually this has a nil impact overall on your corporation tax as what you charge/disburse, you also incur as an expense. Exceptions to this would be if your client is reimbursing a different amount to what you actually incur such as if you get per diem/expense allowance (which can be a red flag for IR35, as we outline further down).‍

What if I incurred the expenses personally, as opposed to from my business bank account?

Let’s put reimbursed client expenses/disbursements to one side for a moment. If you incur any business expenses that you have paid for personally (i.e. not through your business bank account), then you will be able to log an expense claim so that you can reimburse yourself at a later date (shameless promotion: it’s easy to do this within Mighty!). This is no different to if you will be charging the expenses/disbursements back to your client, as this will be done via an invoice from your company, and you can reimburse yourself personally as normal.‍

Are there any IR35 implications?

As IR35 effectively looks at whether contractors are working in a manner akin to employees, it’s important that the way that your expenses are reimbursed aren’t the same as the company’s employees. For example, practices that could have a detrimental impact on your IR35 status could include:

•  Using an internal employee system for logging expenses, as opposed to including them on your invoices. Of course, you may need to present a receipt to evidence the expense, which is fine.
• Being paid an allowance/per diem, which is a policy that is usually applied to employees, as opposed to disbursing the actual expenses you incur.

Of course, this in itself wouldn’t determine IR35, as IR35 looks at various different factors but it’s important to consider all contributing factors.

How can Mighty help?

Regardless of whether you’re looking to reimburse yourself for expenses and/or charge expenses or disbursements to your end client, logging this within Mighty is easy. To learn more, get in touch with us today.