Knowing how to invoice for expenses when you first start out as a contractor, regardless of your profession, is crucial to ensuring you keep up a professional appearance and can breeze through the first few months of your contracting career with your client(s) being none the wiser about your limited contracting experience.
One area that stubs new contractors more than most is knowing how to correctly invoice their clients for any expenses they may occur as a result of undergoing their given tasks and duties. To help put you out of your misery, below we’ve detailed the three main methods you should use in this situation, in order of common, standard usage:
When you add VAT to any expenses you incur while working for your client, such as overnight hotel expenses, reasonable overnight meal expenses, and travel expenses (such as per-mile expenses if you drove yourself, or public transportation expenses if you took any form of public transport), you must also invoice your client for VAT on these expenses, regardless of whether you were charged VAT on these items in the first place.
For example, if you performed £2,000 worth of work for your client, but you incurred £40.00 in petrol costs due to driving out to an in-person meeting with your client (a cost they, kindly, agreed to reimburse), you would invoice them £2,040 (breaking each item down), plus VAT at 20% on the full amount, in this case coming in at £408.00, resulting in a gross invoice of £2,448.
Some clients will (reasonably) turn their noses up at having to pay VAT twice, therefore requiring you to remove any VAT you paid on expenses you claim back from them, then adding it back on when you apply VAT to your final, gross invoice.
In this example, if you performed £2,000 worth of work for your client but you also paid out £2,000 on a training course your client suggested you attend (and promised to reimburse you for), you would have to remove 20% VAT; £200.00, from the cost of your training course before you add it to your invoice.
Your invoice would, therefore, include £2,000 for work done, £1,800 of expenses (your training course), and £760.00 VAT (£3,800 plus 20% VAT), for a gross invoice of £4,560.
Disbursements occur when you purchase something on behalf of your client and pass that cost over to them in your invoice. In this manner, a disbursement isn’t subjected to VAT on your end; this is entirely up to your client to calculate and pay.
There are a number of rules surrounding disbursements, but in general for disbursement to be valid you must have acted as an agent for your client when purchasing said items, such as paying postal expenses for your client, and your client must have given you permission to make this payment on their behalf.
In the example of postal expenses, you add your disbursement costs after adding VAT at 20% to your work done, and expenses. If you performed £2,000 worth of work for your client and you claim £40.00 in petrol costs, you would add £408.00 to £2,040 as in the ‘Adding VAT’ example, followed by adding your postal expenses of, say, £100.00, resulting in a gross invoice of £2,448, plus £100.00; £2,548.
Professional Assistance on How to Invoice For Expenses
For a full list of reasonable contractor expenses, or to speak with a professional to discuss how to invoice for particular expenses, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.
This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.