There are rules governing the invoicing of expenses, that are important to know before creating your first invoice.
Please note that you should keep all your own original invoices and receipts (often referred to as vouchers), and not give any of these to your client, since they are part of your company records and you are required under company law and by HMRC to keep the originals to support your own expenditure.
Legally, the only invoice that your client needs is an original invoice from your company. He is not entitled to your original vouchers as back-up documentation for his own records, although it might not be unreasonable if he were to ask for copies of high-value vouchers.
When invoicing your client for expenses, you should firstly exclude United Kingdom VAT from all the items you are charging on to your client, and then charge VAT on the total amount. Although you yourself will not have paid VAT on certain items, such as travel, postage or overseas expenses, you must still charge VAT on the total amount of any invoice to your client. You are not the original supplier of these services and the expenses you are charging are part of the cost of the services you are supplying to your client. Of course, the effect of charging VAT at this level is NIL because you will pay over the VAT that you collect and your client will reclaim it.
The correct way to account for expenses is for you to record and claim the expenses from your own company, and then for your own company to invoice your clients for whatever expenses you may have negotiated with them. The amount you claim from your own company will often not be the same as the amount invoiced to your client, since for example there may be differences in mileage rates (you may be claiming more or less than the appropriate HMRC rate from your client but you should claim the HMRC approved rates when recording the cost to your company and claiming reimbursement), or, some of the expenses you claim from your company may be included in the daily rate you charge your client.
When working through an agency, you may have an arrangement whereby you invoice the agency for your time and you invoice the client for your expenses.There is no problem with this arrangement, and the correct procedure of invoicing your client and claiming from your own company, as set out above, should still be followed.
You may be offered the facility to claim expenses from your client on a personal basis as if you were an employee of your client, with payment of expenses being made to you personally, rather than through your company. This is not correct, and because it often has the effect of reducing the overall total amount of expenses that you can claim, it is usually less tax efficient. If you do take your expenses in this way, you should expect to receive a P11D from your client at the end of the tax year, even though he may have a dispensation for his own employees.
If you receive a P11D in such circumstances, you should enter the figures in your personal tax return as remuneration relating to a separate “employment” in the name of your client, and not incorporate the totals with P11D figures from your own company. We consider that receiving expenses in this way would strongly indicate that the assignment came within the rules of IR35, since you would be receiving expenses in the same form as your client’s own employees receive their expenses. We would therefore strongly encourage you not to do this.
You may have an arrangement whereby your client settles certain expenses, such as hotel bills, directly with the supplier. This is perfectly acceptable provided that the invoice for the expense is in your client’s company name. There are no complications with HMRC, since the original contract is between your client and the supplier and no money passes through your hands. It becomes your client’s responsibility to ensure that the expense is legitimate from a tax point of view.