When to add VAT

This subject has been causing confusion ever since VAT was introduced in the UK. There are a number of issues to consider.

The fundamental question that any supplier of goods or services should address is: do the goods or services I am recharging to my client / customer form part of the charge for my supply? If the answer is 'yes' the goods or services being recharged have the same VAT treatment as the main supply. If the answer is 'no', it is possible they could take their usual VAT liability e.g. zero-rating for books, aids and adaptations for people with disabilities; exemption for insurance and financial services, or they could be treated as disbursements, which are outside the scope of VAT.

Another helpful way of deciding the correct treatment is to ask: to whom is the relevant supply made, which is subsequently recharged? Is it to the person making the recharge, or to the ultimate customer?

As with any principles, the best way to understand them is through examples.

Example 1

An accountant from Birmingham visits a client in London and travels by train. The purchase of his train ticket constitutes a zero-rated supply of passenger transport, but as the supply is made to the accountant, not his client. The fare in fact forms part of his charge for his supply of accountancy services to his client. Therefore, the recharge carries the same VAT rate as the accountant's main supply of accountancy services and is standard rated. Put another way, the accountant is not making a zero rated supply of passenger transport, so the charge must be standard rated.

Example 2

A solicitor providing conveyancing services to his client, pays a Land Registry fee on his client's behalf. As the cost is actually the direct responsibility of the client, the solicitor can treat it as a disbursement, meaning no VAT is due on the amount recharged.

Example 3

A housing association owns a block of flats and rents them out to tenants (exempt from VAT). It also recharges the cost of the upkeep of the structure and common areas of the block e.g. cleaning of stairwells, gardening. Even though the services bought in from the cleaners and gardeners are standard rated, the service charge passed on to the tenants is considered part of the housing association's supply of accommodation and is thus also exempt from VAT. Note that this does not apply to services supplied to a tenant's individual flat e.g. repairs. Those services take their usual VAT liability (normally standard rated).

In cases where it is not clear whether a recharge is part of a main supply, is to take its own, normal VAT liability or can be treated as a disbursement, advice should be taken.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant* face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee of £120 plus VAT per month.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com.

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.