Tax Questions: Passing on Cost of Travel to Clients
When it comes to VAT for travel expenses you pass on to your clients it is easy to get confused over correct handling of tax. Should standard-rate VAT be added even though travel costs are zero-rated for example and how should you invoice clients so that they can claim back a VAT cost they have incurred?
Before considering VAT treatment of travel costs, lets recap on tax rules for transport. When buying a rail, bus, or plane ticket, the fare is subject to VAT, but zero-rated and no VAT is charged. This is because supply of travel via a means of transport that can accommodate 10+ people is VAT zero-rated. Don’t assume VAT has been paid on this travel and reclaim a 1/6 proportion of the total assuming it relates to VAT (the figure includes VAT). (See Government VAT calculator for help).
If a travel fare isn’t zero-rated then it’s definitely standard-rated, unless the person or business is not VAT registered. Like other VAT incurred while running your business, you can reclaim it subject to normal rules.
Take care with taxi and minicab fares. Vatable (unless the vehicle is designed to carry 10 or more passengers) many drivers work for themselves even where they drive under the banner of a taxi company. There’s good chance they won’t be VAT registered and charges won’t include VAT for you to reclaim.
If you or one of your employees uses a cab for a business journey, ask for a receipt. If it shows the driver or firm is VAT registered, it’s sufficient evidence to assume VAT has been charged if the receipt doesn’t show the VAT amount separately.
Passing on cost
One way or another you’ll factor in the cost of travel to the fees you charge your clients. You might wrap it up in your fees or charge it as a separate identified item on your invoice. It’s a common misconception that passing on travel costs using the latter method counts as the recharge of a disbursement which can be ignored for VAT purposes.
While HMRC accepts disbursements can be treated this way, it doesn’t apply in most circumstances. Instead, the recharged costs count as an element of the main supply (even if invoiced separately). So, if the main supply is standard rated so are recharged costs.
Let’s illustrate this.
Say you are a VAT-registered bookkeeper who travelled by train and taxi to visit a client. On the invoice for services you charge £600 plus a separate charge of £50 for the cost of rail fare and £24 (which included VAT of £4) for the taxi. Even though the rail ticket was zero-rated it was the rail company that supplied travel services to you and so it can zero-rate the charge.
When you recharge it to her client it’s just part of the supply, which is not travel but bookkeeping services. To pass on the cost to the client you must add standard-rate VAT to the recharged costs, i.e., £60 (£50 + 20% VAT) for the rail fare and £24 (£20 + 20% VAT) for the taxi. So, they are not out of pocket for the VAT element of the taxi fare they can reclaim the £4 they were charged.
If you recharge your travel costs to your clients, you must treat them as part of the charges for your services even if you bill them separately. Therefore, if your main supply services are standard rated then so must the recharge of costs. If the travel costs you incurred included VAT, you can reclaim this.
For help calculating your tax including passing on the cost of travel to customers correctly, get in touch with our team on Let’s Talk.