When you recharge expenses to a client you must raise a sales invoice and charge the client the amount you incurred excluding VAT and then, if you are VAT registered, charge VAT on this amount.
Many Contractors and professionals are in the fortunate position of being able to recharge certain expenses to their clients. For example, the cost of a train ticket to visit a client site or the cost of advertising bought on the client’s behalf.
For the benefit of this post we will assume that you have incurred a cost of £200 + VAT getting some t-shirts printed, that you are able to re-charge to your client.
This post assumes that your company is VAT registered.
The basics of recharges
There are two transactions involved with re-imbursed expenses:
- The original expense you incurred.
- The ‘sale’ of the expense to your client.
From an accounting perspective you have an expense (1) and a sale (2).
So in your accounts this will appear in two places, the expense account and the sales account. Taken together they should cancel each other out, resulting in profit of £0.
You need to ensure you do not double count the VAT when recharging your clients. To do this you need to charge your client the amount of your costs excluding VAT but then add 20% VAT on top of that. So taking our T-Shirt example.
The T-Shirts cost us £200 + £40 VAT= £240. So the amount excluding VAT is, of course, £200. When recharging the client we have effectively sold them T-Shirts for £200 + VAT, so the sales invoice in Xero would look like this:
Note that we are not charging £240 + VAT = £288. Doing so would result in us double counting the VAT.
Now, let’s take an example of a cost incurred of £100 that did not have any VAT on it:
To visit a client site we have to buy a train ticket for £100. Train tickets do not have VAT on them so on the expense side of the transaction there is no VAT to account for.
The sale we make though is still a sale from our company and like any other sale must include VAT.
Like the T-Shirt example then we have to charge our client the amount incurred, excluding any VAT then add on our VAT so:
Using Xero to track expenses for reimbursement
Xero has introduced a great way to keep track of the expenses that you need to recharge your customer. Below we detail the step by step process to record the expense incurred and then to recharge it to your customer using Xero’s recharge system. At the end there is a video showing the full process being completed.
Enter the expense:
- Go Accounts > Purchases > + New Invoice.
- Enter all invoice details as usual (see how to do that here).
- Before clicking Approve click ‘Assign expenses to a customer’ this will be in blue to the left of the subtotal.
- Using the dropdown menu pick the the customer you want to recharge this expense to.
- Click Approve.
Raising the sales invoice:
- Go Accounts > Sales > + New Invoice
- Enter the customer name in the To box. Enter the Date, Due Date and Invoice number as usual.
- Click on the blue line that says ‘x billable expense can be added’.
- Tick all the expenses you want to recharge in this invoice.
- Click Add Items.
- Pick a Sales account to record the sale (eg 200 – Sales).
- Click Approve.
By using this Xero process you can keep track of what has been charged to the clients and avoid entering the details twice.