Adding VAT to Invoices

How Much VAT to add to an invoice

For a VAT registered business, the starting point is that you add 20% to your invoices. For a consultancy business, the invoice probably contains cost of time and cost of expenses. The pre VAT charge for both of these in the example below are £1000 and £200. Both have 20% added, generating an invoice with the following information:

Sample Invoice

You subsequently expect a payment of £1,440, of which you will keep £1,200. You might also keep some of the VAT ie a portion of the £240 (1). The VAT return below explains this.

Similarly, for a business selling a product, VAT (20%) is added to the price of the product. In the chair example in the HMRC VAT Chain, the retailer wanted to receive £1,000 for the chair. The data for the invoice being:

Chair £1000 + VAT (20%) £200 = Gross Price £1,200

The retailer expects to be paid £1,200 of which they keep £1,000 and some of the £200 as per the VAT return, which is next.

Within the consulting example above, is the issue of whether you invoice expenses at gross cost or net cost. In the example, the expenses cost was a gross of £200 which, to keep the numbers simple we assume is £166 of net costs plus £34 of VAT. The consultancy has paid this £200. There is divided opinion on whether this £200 should then be invoiced as £200 gross or £240 ie add a further 20% VAT to the £200 cost (£200 plus VAT £40 = £240). In the second example the consultancy is making an additional £40 from the same cost base. It seems to me that both methods are being employed. I can only recommend that you agree this with the customer. Obviously if this worries you, please seek professional advice on your specific case. 


(1) In fact, you might actually claim back more than £240 from HMRC. But we have left that out for now to keep the example simple