Recharging expenses to client

I am a self employed photographer and I recharge a lot of expenses back to my clients, for example items purchased for shoots. If I recharge these costs to my client do I still need to claim them on my tax return?


Recharging expenses to client


Answer January 2018

Recharging of expenses is a common business practice, however it can be quite confusing – what surprises a lot of people is that the expenses you incur do have to be recorded as a business expense on your tax return even if they are being recharged.

At first, it might seem as if you’ll be getting a good deal by doing this – but, of course, this is not the case.

In order to record your recharged expenses correctly, you must make sure you are factoring these costs into both your income and expenses.

Basically, you add the amount you’re recharging to your client to your sales income, and you add the cost of the goods and services you’ve purchased to your business expenses.

If you’re simply passing on the exact amount of each cost you’ve incurred, your profit, and therefore your tax bill, will not change. Let’s look at a simple example to illustrate this.


Accounting treatment of recharged expenses

Say you charge £1,000 for a photo shoot and incur £500 expenses, which you recharge in full to your client.


accounting treatment recharged expenses


As you can see, your profit is £1,000 with each of the two methods, however the correct figures to disclose to HMRC are £1,500 for income and £500 for expenses.

One key benefit of making sure you are splitting out your income and expenses in this correct way is that it reduces the risk of you making errors and potentially forgetting to claim all the expenses you can.


Recharging expenses with a profit

It won’t always be the case that you will recharge your expenses at cost price – sometimes there might be a margin on top or you might have agreed a certain fee with your client.

In these circumstances you simply record the amount you recharge to your client as revenue and record the actual cost as your expense.

If we look at the earlier example but with a 20% gross up of the expense cost, the transaction would be recorded like this:


recharged expenses


You can see that your profit is now £100 higher at £1,100


VAT and recharging expenses

Another very important reason for recording your recharged expenses properly is that doing so gives the correct figure for your turnover – something you need to keep track of if you’re approaching the VAT registration threshold (£85,000 for 17-18).

In our example, if you only record your sales income as £1,000, you may be understating your turnover and run the risk of exceeding the VAT threshold without realising until it’s too late.

However with VAT things are never as simple as they seem – not all recharged expenses will count towards the VAT registration threshold – items that are classed as disbursements will not count as part of your revenue for VAT registration purposes.

Should your business be registered for VAT already you will normally have to charge VAT on any expenses you recharge. This is the case even if you did not pay any VAT when you purchased the item or service.

The exception to this is where the expense can be treated as a “disbursement” as mentioned above, in which case VAT should not be charged.