Management consultants travel a lot, visit customers abroad, spend the night in hotels. In short, they cause considerable expenses, which are charged to the customer – usually separate from the actual consulting service.
There are two different methods of how these costs can be passed on to the customer.
Passing on costs to the customer
Here the expenses are classified as production costs of the own achievement, it concerns thus input factors for the own service production, which are usually separately shown in the customer calculation. With a consultant, these are travel expenses, external food supply, hotel costs, etc..
These invoices/expenses are issued to and paid for by the management consultancy. They are therefore directly related to the service received by the client. The consultant must add 7.7% VAT to these expenses since his “total remuneration” is subject to VAT. He cannot assess certain items of the customer invoice as not subject to VAT. This is also the case if the expenses are charged to the customer separately – thus differentiated from the costs of the actual consulting service -. The presentation has no influence.
Often the opinion prevails that expenses incurred abroad are to be charged to the customer without value added tax. But this is a mistake. Irrespective of whether the expenses were incurred abroad (e.g. hotels, flights), the consultant must always charge the standard VAT rate of 7.7%. This also applies if the expenses in Switzerland were subject to the normal VAT rate of 7.7%, the special rate for the accommodation of 3.8% or the reduced rate of 2.5% for foodstuffs. In general, the consultant may not issue customer invoices or even individual invoice items without VAT or at a preferential rate.
This may be confusing but has been clearly and unambiguously stated by the Federal Tax Administration.
The fee includes the reimbursement of all costs, even if they are invoiced separately. This could be, for example, the case:
– Expenses for travel, meals, accommodation, etc., even if these were incurred abroad.
Agreement on cost basis important
Often we hear the objection: “Then the customer pays, however, twice the value-added tax… that cannot be nevertheless!
First, the customer can make generally use of its input tax deduction right and deduct the value-added tax paid on the consulting service and/or expenses from its own VAT – load. Secondly, the adviser can agree with the customer freely whether the customer only the net price of the expenses (thus excluding VAT) plus the VAT of 7,7% or the gross price (thus paid expenses inclusive VAT) plus the VAT of 7,7% are charged.
The question, whether the consultant offsets his VAT rate of 7.7% on a net or a gross price is ultimately only a question, which cost basis was agreed with the customer. If the gross price serves as a cost base of +7.7%, the consultant collects the input tax on an expense that is ultimately borne by the customer. If net prices of +7.7% were agreed upon as the cost basis, the consultant loses this financial advantage. To put it differently, the consultant then simply has a zero margin at his expense – actually an aberration, because the use of these necessary services requires administrative effort, such as the search for and selection of offers, an effort for internal accounting, etc..
By way of comparison, a retailer cannot allocate proportionate rental costs to his sales and demand that he does not claim and account for VAT on this part of the cost, as the rental is not subject to VAT. A restaurant cannot charge the cost of the food at the reduced rate of 2.5% but charges the standard rate of 7.7%. Such an approach would be impracticable.
The consultant books the expenses in his bookkeeping as business-relevant expenditure, the payments of the customer – whether for the consulting service or for the expense compensation – are booked as income. The original expense receipts are stored for at least ten years with the consultant, not with the client.
In order to pass expenses on to customers, the method of transitory items can also be used in addition to the usual further charging. This is the method that many consultants would like to use, but often do not implement sufficiently.