Charging your clients VAT on expenses

If you have negotiated with your client that you can invoice them for expenses, with inniAccounts you simply mark expenses as billable then within seconds add them to an invoice.

Once an expense or mileage claim is identified as billable, when you create an invoice you simply select the expense from a list to add it. Care needs to be taken however to make sure that you charge your customers the correct amount of VAT.

Recording your billable expenses

When you record your expenses in either the Quick Entry area (business expenses paid for using personal money) or Bookkeeping (business expenses paid direct from a business account) you need to select the contract that will be billed for the expense. When you create your next invoice you can select the billable expenses to add.


When you enter the expense in the Quick Entry area or Bookkeeping, you must select the exact VAT rate incurred on the expense. The best way to check this is to refer to your receipt. This is to ensure later you invoice your client correctly for VAT.

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Invoicing billable expenses

When you create your invoice you can click ‘Add invoice line’ then select ‘billable expense’ from here you will be able to select the expense you wish to bill your client for. The same applies when billing mileage, select the ‘billable journey’ option.

Charging VAT on billed expenses

If you are VAT registered you must ensure that VAT is charged on all your billable expenses, even if you did not incur VAT yourself.

Here are some common examples of expenses and their typical treatment of VAT when billing a client:

  • Hotel stays – normally standard rate VAT. You bill your client exactly what you paid which includes VAT.
  • Train tickets – public transport is zero rated. You charge your client what you paid but you will add 20% VAT.
  • Flights – VAT can be complicated on flights but generally they are zero rated. You charge your client what you paid but you will add 20% VAT.
  • Mileage – if you’ve negotiated a rate of 45p per mile with your client, you will charge for the number of mileage times the rate and you’ll add 20% VAT.

In general VAT must always be charged but you must not charge VAT on top of VAT. If you didn’t incur VAT on the expense, you charge VAT. If you incurred VAT on the expense, you don’t charge it again.


You should check the VAT applied to your billed expenses:

  • If the expense originally was zero rated or exempt: ensure that VAT is applied to the expense on your invoice as you must charge VAT on that expense. If the line on your invoice shows Exempt or Zero rated, click the pencil icon and change it to Standard (20.00%).
  • If the expense originally included VAT: the billable expense on your invoice will show as Standard (20.00%) VAT. Note that the amount shown on your invoice will appear less that the amount you paid. This is because on the invoice line it will show the Excluding VAT amount. The VAT is added at the bottom with the total for the invoice. The sum of the Excl VAT expense and the VAT will equal what you paid.
  • If you add billable mileage: add billable mileage to your invoice by using the select the ‘billable journey’ option. If you are billing at 45p per mile, VAT must be charged on top of this. For example, if you bill 100 miles at 45p you invoice will show £45.00 excl VAT on the mileage item of your invoice then at the bottom there will be £9 VAT.

VAT can be complicated and the above is general guidance. If you are unsure if the treatment above applies to your circumstances, please get in contact to discuss.

Why do I need to charge VAT on expenses?

Expenses must be ‘recharged’ plus VAT at the rate at which your business charges it, i.e. 20%. In other words, if you recharge costs to your client you must charge VAT because the expense was for you, not for the client. In other words you stayed in the hotel and you travelled on the train – not your client.

An extract from HMRC website :

“There are many incidental costs that your business might incur that you can’t exclude from the VAT calculation when you invoice your customers. These could include travelling expenses and your own postage costs. They aren’t treated as disbursements for VAT purposes.
Any costs that your business incurs itself in the course of supplying goods or services to customers are not disbursements for VAT purposes. It’s you, and not your customer, who purchases the goods or services, which are supplied to and used by your business.
It’s up to you whether or not you itemise costs like these on your invoices. If you do show them separately when you invoice your customers then they’re known as ‘recharges’, and not disbursements, for VAT. You’ll have to charge VAT on them whether you paid any VAT or not.
Some examples of costs that could be recharges but are not disbursements include:
– An airline ticket that you buy to visit a client or to travel to a job. If you recharge the cost to your client you must charge VAT because the flight was for you, not for the client.
– Postage costs you incur when you send letters to your customers. These are normal business costs and you must add VAT if you recharge them.
– A bank transfer fee you might incur when transferring money from your business account to a client’s own account. Even though the bank’s fee is exempt from VAT, if you recharge the fee you must charge VAT. This is because it was for a service provided to your business and not to your customer.”

A further extract from Section 25.1 of HMRC Reference: Notice 700 sections 25-30:

“You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

– you acted as the agent of your client when you paid the third party;
– your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes);
– your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client);
– your client authorised you to make the payment on their behalf;
– your client knew that the goods or services you paid for would be provided by a third party;
– your outlay will be separately itemised when you invoice your client;
– you recover only the exact amount which you paid to the third party; and
– the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes.”