As a self-employed person, you sometimes incur expenses on behalf of a customer. These might include hotel stays, taxi fares or other out-of-pocket expenses. But how should you pass these costs on to a customer? And what does this mean for your bookkeeping and VAT?
In this article, we provide an explanation step by step.
Via a sales invoice
If you want to pass on costs to your customer, you must always create a sales invoice. You can select how to do this:
- On the same invoice: you list the passed-on costs alongside your own services.
- On a separate invoice: you create an invoice solely for the passed-on costs.
Both options are permitted; the accounting treatment remains the same.
Example
You pay €200 for a hotel stay during an assignment abroad.
You list the €200 on your sales invoice and that amount counts as turnover in your accounts.
What is the impact on the accounts?
You issue a sales invoice to your customer to pass on costs. The passed-on costs are turnover for your accounts. There is no special rule for passed-on costs. You invoice them and they are included in your turnover.
You then also record the expenses in your accounts. The costs you pass on to your customer are thus also recorded as a cost in your accounts. This means no profit remains in your accounts.
- The passed-on costs become turnover in your accounts.
- At the same time, you also record the original cost in your own accounts.
- In this way, turnover and cost cancel each other out, meaning no extra profit is generated.
Example
You pass on €200 in hotel costs to your customer; this is €200 in revenue. You record the hotel invoice as a cost; this is a €200 expense. Net effect: no extra profit in your accounts.
You no longer have the document to enter into your accounts?
If you have lost the original document (e.g. a taxi receipt), you cannot record the cost.
Your bank statements show you how much it cost, so you know which costs to pass on to your customer. You add this item to your sales invoice; the passed-on costs are therefore invoiced and included in your revenue.
You no longer have proof of the taxi cost because you’ve lost the receipt. You cannot therefore enter this cost in your accounts.
- As always, the cost passed on remains turnover
- There is no corresponding cost, meaning extra profit remains in your accounts
Example
You pass on a €100 taxi fare to your customer, but you don’t have a receipt.
- You invoice your customer for €50; this is turnover.
- Without a document, you cannot record the €50 as an expense.
Passing on costs to a customer: what about VAT?
The VAT on your passed-on costs follows the same VAT rate as the main transaction, your services. The ancillary transaction follows the main transaction.
The VAT on passed-on costs always follows the VAT rate of your service, not that of the original cost.
Example
- You provide services subject to 21% VAT
- You pass on a hotel cost with 6% VAT on the original receipt. On your sales invoice, you invoice the hotel cost with 21% VAT
This may seem strange, but the secondary item (hotel cost) follows the VAT rate of the primary item (services). There is no advantage or disadvantage to this. In this case, you invoice at 21% VAT, you receive that extra VAT and pass it on to the tax authorities. Your customer can reclaim that charged VAT.
Exception to the VAT rate
If you pass on costs only without any other services, you use the VAT rate of the original cost. This rarely occurs in practice.
Exception to passing on costs via a sales invoice: purely financial transfer
There is one exception where you do not create a sales invoice. If it concerns a purely financial transfer, you do not need to pass on any costs to a customer.
You advance a cost financially, but the document goes directly into the customer’s accounts. You therefore do not record the cost in your own accounts; you have simply paid.
You do not record the cost in your own accounts and simply receive the advanced amount back. This is a purely financial refund, not a passed-on cost.
You therefore do not need to create a sales invoice here to pass on the cost to your customer. Because nothing has happened in your accounts.
In summary
- You always pass on costs effectively via a sales invoice.
- The passed-on costs are turnover, but you also record the original cost, meaning no profit remains.
- Without supporting documentation, you cannot record the cost and extra profit remains.
- For VAT, the rule is: the secondary follows the primary. Only if you do not provide any services do you use the VAT rate of the original cost.
- A purely financial transfer? Then you do not issue an invoice.
