Insights
VAT
Passing on costs in VAT
In business practice the question often arises how the passing on of costs should be treated for VAT purposes. It must be clarified whether a pass‑on is subject to VAT and – if so – which rate applies.
For this it is decisive whether the passed‑on costs form part of the consideration for a supplied service or whether they are to be qualified as pass‑through items.
Pass‑on as part of the consideration for a supplied service
All transactions that are based on a supply exchange are subject to value‑added tax. A supply exchange requires that a service and a counter‑consideration are provided. This is also the case when the entrepreneur merely passes on an amount equal to the actual costs as consideration for his service. Therefore the amount of the consideration is irrelevant for the classification as a supply exchange.
Passed‑on costs that are to be regarded as a “non‑independent ancillary service” to the main service are treated for VAT in the same way as the main service. For VAT purposes the same rate applies to the ancillary service as to the main service.
Example
An entrepreneur, in the course of a consulting service, also passes on mileage allowance to his client. Even though this is merely a cost reimbursement, the mileage allowance is subject to the same rate as the consulting service. It is important that the VAT is correctly calculated on the net amount of the passed‑on costs. If the main service, for example, is subject to the 20 % rate, this rate also applies to all related ancillary services.
Pass‑through items
Pass‑through items are amounts that an entrepreneur merely receives or disburses in the name and on behalf of another entrepreneur. In this case there is no own supply exchange between the receiving entrepreneur and the client. The amounts therefore do not form part of the consideration and are not subject to VAT. Pass‑through items include, for example, local and tourist taxes, prescription fees and court fees.
Pass‑through items do not have to be shown on the invoice. If they are listed on the invoice, it must be clearly identifiable which amounts the entrepreneur has received or disbursed for his own services and which he has received or disbursed on behalf of another entrepreneur.
It is important that the pass‑on is always net, because no VAT is charged on the pass‑through items. However, if the entrepreneur combines his own services and the pass‑through items in a single total amount and calculates the VAT on the total amount, the entrepreneur owes the VAT “by virtue of invoicing”.
Pass‑on as part of the consideration for a supplied service
All transactions that are based on a supply exchange are subject to value‑added tax. A supply exchange requires that a service and a counter‑consideration are provided. This is also the case when the entrepreneur merely passes on an amount equal to the actual costs as consideration for his service. Therefore the amount of the consideration is irrelevant for the classification as a supply exchange.
Passed‑on costs that are to be regarded as a “non‑independent ancillary service” to the main service are treated for VAT in the same way as the main service. For VAT purposes the same rate applies to the ancillary service as to the main service.
Example
An entrepreneur, in the course of a consulting service, also passes on mileage allowance to his client. Even though this is merely a cost reimbursement, the mileage allowance is subject to the same rate as the consulting service. It is important that the VAT is correctly calculated on the net amount of the passed‑on costs. If the main service, for example, is subject to the 20 % rate, this rate also applies to all related ancillary services.
Pass‑through items
Pass‑through items are amounts that an entrepreneur merely receives or disburses in the name and on behalf of another entrepreneur. In this case there is no own supply exchange between the receiving entrepreneur and the client. The amounts therefore do not form part of the consideration and are not subject to VAT. Pass‑through items include, for example, local and tourist taxes, prescription fees and court fees.
Pass‑through items do not have to be shown on the invoice. If they are listed on the invoice, it must be clearly identifiable which amounts the entrepreneur has received or disbursed for his own services and which he has received or disbursed on behalf of another entrepreneur.
It is important that the pass‑on is always net, because no VAT is charged on the pass‑through items. However, if the entrepreneur combines his own services and the pass‑through items in a single total amount and calculates the VAT on the total amount, the entrepreneur owes the VAT “by virtue of invoicing”.