How do you pass on expenses? - Part 3: Do I deduct the VAT I paid?

Should expenses such as travel, lodging, or meals be passed on to the customer, there are several points to consider. In our last post, we explained which VAT rate you need to apply when invoicing these expenses to your customers. Today, we will show you the options you have regarding the VAT you have already paid.

As we explained in the last post, expenses are invoiced with the VAT rate applicable to the respective service. In most cases, this is 7.7%. But what about the VAT component in your costs that you have already paid? Do you add the VAT to the net amount (excluding the VAT you paid), or to the gross amount (including the VAT you paid)? The choice is yours, but it should be agreed upon with the customer in advance to avoid misunderstandings.

Both methods have their advantages and disadvantages. If you invoice your customers the net amount, they ultimately have less to pay. However, for you, it then becomes a zero-sum game, since you don't gain any financial advantage for the administrative effort involved with the expenses (searching for hotels, booking flights, managing expense invoicing, etc.). If you invoice the gross amount (i.e., including the VAT you paid), it costs your customers more, but you keep the VAT amount as compensation for your efforts related to the expenses. What also should not be forgotten is the tool of input tax deduction. With this, you and your customer can usually deduct the paid VAT from your costs.

An example of both methods: A consultant travels by train for a day from Zurich to Geneva and returns home in the evening. He pays 88.00 Fr. for the train, including 7.7% VAT (81.70 Fr. net + 6.30 Fr. VAT).‍

Re-invoicing the net amount

‍81.70 Fr. + 6.30 Fr. (7.7 % VAT on 81.70 Fr. = markup by the consultant) = 88.00 Fr. incl. 7.7 % VAT

‍Re-invoicing the gross amount

‍88.00 Fr. + 6.80 Fr. (7.7 % VAT on 88.00 Fr. = markup by the consultant) = 94.80 Fr. incl. 7.7 % VAT

In the net amount method, the customer pays a total of 88.00 Fr., of which 6.30 Fr. is VAT added by the consultant. The consultant pays 6.30 Fr. in VAT for the train and owes the state the same amount, as his customer pays him 6.30 Fr. in VAT.

Using the gross amount as the cost basis, the customer pays a total of 94.80 Fr., of which 6.80 Fr. is VAT added by the consultant. The consultant also pays 6.30 Fr. in VAT for the train, but he owes the state 6.80 Fr., since his customer pays him 6.80 Fr. in VAT. Thus, the customer pays 6.80 Fr. more using the gross method.

Now we consider the input tax deduction: The 6.30 Fr. (7.7 % VAT for the train) can be claimed by the consultant as input tax deduction in both methods, and thus deducted from his costs. The customer can also deduct the VAT paid to the consultant as input tax. In the net amount method, this is 6.30 Fr, and in the gross method, it is 6.80 Fr. This makes the overall calculation look like this:

‍Re-invoicing the net amount

‍Consultant's revenue: – 88.00 Fr. (train incl. VAT) + 88.00 Fr. (invoice to customer incl. VAT) – 6.30 Fr. (VAT received from the customer) + 6.30 Fr. (VAT for train as input tax deduction) = 0.00 Fr.Customer's cost: – 88.00 Fr. (invoice from consultant incl. VAT) + 6.30 Fr. (VAT for consultant as input tax deduction) = 81.70 Fr.

Re-invoicing the gross amount

‍Consultant's revenue: – 88.00 Fr. (train incl. VAT) + 94.80 Fr. (invoice to customer incl. VAT) – 6.80 Fr. (VAT received from the customer) + 6.30 Fr. (VAT for train as input tax deduction) = 6.30 Fr.Customer's cost: – 94.80 Fr. (invoice from consultant incl. VAT) + 6.80 Fr. (VAT for consultant as input tax deduction) = 88.00 Fr.

‍It is clear that using the net amount as the cost basis, the consultant has no margin for his administrative effort related to the expenses. Conversely, the customer pays less. However, using the gross amount as the cost basis, the consultant retains the VAT amount paid for his effort.

In the last post of our series "How to Invoicing Expenses?" we explain another way to let your customers pay for travel, lodging, or meal costs.

Findea helps you keep your taxes simple and straightforward.