Passing costs on to your client: how does VAT work?

Passed-on costs belong to your service

If you pass on costs you incurred for your own assignment, those costs form part of your fee. You therefore invoice them at the VAT rate of your own service, regardless of the rate on the receipt. If you travel to a client by train and charge for that ticket, the ticket carried 9 percent VAT, but you pass it on at 21 percent if your service falls under that rate. The same applies to materials, printing costs or an overnight stay.

You simply reclaim the VAT on the original receipt as input tax, to the extent you're entitled to deduct. So you neither gain nor lose on the rate difference: you pay VAT on the amount you charge your client.

When is it a disbursement?

Sometimes you pay an amount upfront that really belongs to your client. Think of court fees, a Chamber of Commerce registration or a levy in your client's name. If the invoice is in the client's name, you only pay on their behalf and you book the amount through a suspense account without adding anything, then it's a disbursement. That stays outside VAT: you charge no VAT on it and deduct none yourself. Show such an item separately on your invoice, below your own fee and outside the VAT calculation.

Travel costs and mileage

If you drive your own car to a client and agree a mileage allowance, that allowance is part of your service for VAT: you charge the rate of your service on it. You may set the per-kilometre amount yourself; the tax-free mileage rate of 23 cents is a limit on what you can deduct from your profit, not a cap on what you may charge your client. Put the arrangement in writing, because disputes about travel time and mileage are a classic source of unpaid invoices.

What do you put on the invoice?

Itemise passed-on costs as separate lines, with a short description and the quantity. That prevents questions and makes your invoice verifiable. Keep the underlying receipts with the invoice in your records; in an audit the tax authorities want to see that the amounts passed on were genuinely incurred. If you add a mark-up to purchase prices, that's simply turnover and you don't have to show the purchase price.

What's sensible to do?

Agree in advance which costs you pass on and at what amount, and put that in your quote or terms and conditions. Clients rarely mind costs they saw coming, and often mind surprises afterwards. If you're unsure whether something is a disbursement or simply part of your service, run it past us before invoicing; correcting it later means issuing a credit note.