When is a cost charged to a customer a pass-through expense, a recharge, or part of your own service? – UKKO Entrepreneur - FAQ

When your limited company purchases something and later charges the cost to your customer, the cost may be:

The key factors are whose name the original purchase invoice is in, on whose behalf the purchase was made, and what you have agreed to sell to the customer.

Simply charging the customer the same amount without adding a markup does not make the cost a pass-through expense. It also does not, by itself, determine whether the cost should be recharged separately or treated as part of your own service.

1. If the purchase invoice is in your customer’s name: pass-through expense

The cost may be a genuine pass-through expense when:

the original purchase invoice or order is in your customer’s name
the purchase belongs to your customer
your limited company pays the cost on your customer’s behalf
you charge your customer the same amount without adding your own markup or margin.

In this case, the cost is not an expense of your limited company or an actual sale. In the accounts, it is treated through the balance sheet as a receivable from your customer. It is not recorded in your company’s income statement as an expense or sales revenue.

VAT treatment of pass-through expenses

For a genuine pass-through expense:

do not add VAT to the amount charged to the customer
do not deduct the VAT included in the purchase invoice
use the VAT treatment intended for pass-through expenses in the service.

When invoicing, use the VAT 0% code and select the reason code “Official charges treated as pass-through expenses”. Although the name of the item refers to official charges, the same treatment can also be used for other genuine pass-through expenses.

Add a clear description to the purchase receipt, for example:

This is a pass-through expense, not an expense of the company.

Example: an official charge in the customer’s name

Your customer needs a permit, and the authority’s invoice is addressed to your customer. Your limited company pays the invoice on your customer’s behalf and charges the same amount back to the customer.

This is a pass-through expense. You do not add VAT to the amount charged, and you do not deduct the VAT included in the purchase invoice.

2. If the purchase invoice is in your company’s name: recharge

If the original purchase invoice is addressed to your limited company, it is generally your company’s own purchase. This also applies when you later charge the exact same amount to your customer without adding a markup.

In this case, the cost is generally not a pass-through expense.

You then need to determine whether it is:

a recharge, meaning a product or service sold separately to the customer, or
a cost included in the main supply, meaning a cost incurred while providing your own work or service.

The cost is a recharge when your limited company purchases a product or service in its own name and sells it to the customer as a separate product or service.

In this case:

Add the purchase invoice to your accounts as normal by creating an expense.
Treat the VAT on the purchase invoice according to the invoice and deduct it if the purchase is related to business activities that entitle your company to deduct VAT.
Invoice the amount charged to the customer as sales revenue.
Use the normal VAT treatment for the product or service that your limited company is selling to the customer. This is the main supply, meaning the actual product or service to which the charge relates. In practice, the VAT rate is often the same as on the original purchase invoice, but there are exceptions.

Example: a software license sold separately to the customer

Your limited company purchases a software license in its own name and sells the license to the customer for the customer’s use. The license has been agreed as a separate purchase, for example in addition to an implementation service.

This may be a recharge if:

the software license is a separate purchase for the customer
your company sells the license to the customer as a separate product
the sale of the license is treated as separate sales revenue.

Which VAT rate should be used for a recharge?

When recharging a cost, invoice the customer using the VAT treatment applicable to the product or service that is being sold separately.

In practice, the VAT rate is often the same as on the original purchase invoice. For example, if your company purchases a product to be resold to the customer with 13.5% VAT, the sale to the customer will usually also be subject to 13.5% VAT.

However, do not assume that the customer should be invoiced without VAT simply because the original purchase invoice did not include VAT. The original purchase may be VAT-free, for example because the original seller is not registered for VAT. If your company resells the product or service to the customer, the sale may still be subject to VAT.

3. If the purchase invoice is in your company’s name: cost included in the main supply

Not all costs charged to customers are pass-through expenses or purchases that should be recharged separately.

If a cost is incurred because your limited company needs it to carry out the work or service sold to the customer, it is generally a cost included in the main supply.

Examples include:

travel expenses
accommodation expenses
materials used for the work
postage, packaging and freight costs
software or tools needed to carry out the work
other costs incurred while performing the work.

In this case, you are not selling the cost to the customer as a separate product or service. The customer is buying the actual work or service from your company, and the costs form part of its price.

If the cost is directly related to the work or service sold by your limited company, treat it as your company’s own purchase. The amount charged to the customer is generally invoiced using the VAT rate applicable to the main supply, meaning the actual work or service.

Example: travel expenses related to a service

You sell a VAT-liable consulting service to your customer and visit the customer’s premises. You also charge the customer for travel and hotel expenses.

In this situation, the customer is not buying a train journey or a hotel night from your company. The customer is buying a consulting service. The travel and accommodation expenses arise because you need to incur them in order to provide the service sold to the customer.

The costs are therefore generally part of the consulting service and should be invoiced using the same VAT rate as the consulting service.

How to identify the correct treatment

Ask yourself the following questions:

Whose name is on the original purchase invoice?
On whose behalf was the purchase made?
Did your limited company only pay the cost on behalf of your customer?
Or did your limited company purchase the product or service itself and sell it to the customer?
What have you agreed to sell to the customer?
Is the cost related to carrying out your company’s own work or service?

Rule of thumb

The purchase invoice is in the customer’s name and your company pays the cost on the customer’s behalf: pass-through expense.
The purchase invoice is in your company’s name and a separate product or service is sold to the customer: recharge.
The purchase invoice is in your company’s name and the cost is incurred while providing your company’s own work or service: your company’s own cost, generally invoiced using the VAT rate applicable to the main supply.

Please also note

The person who pays the invoice does not, by itself, determine whether the cost is a pass-through expense.
The absence of a markup does not make a cost a pass-through expense.
For a genuine pass-through expense, the purchase must be made in the customer’s name and on the customer’s behalf.
If the receipts do not show that the purchase was made on behalf of the customer, treat it primarily as your limited company’s own purchase and as a sale to the customer.
If you use both approaches, add a clear description to the receipts stating whether the cost is a pass-through expense or your company’s own purchase.

Frequently asked questions

Can I treat a cost as a pass-through expense if the purchase invoice is in my company’s name but I do not add a markup?

Usually not. If the purchase invoice is in your company’s name, it is generally your company’s own purchase and a sale to the customer. The absence of a markup does not change the treatment.

Can I deduct the VAT included in a purchase invoice for a pass-through expense?

No. In a genuine pass-through expense, your company is not the actual purchaser of the product or service, so the VAT included in the purchase invoice cannot be deducted.

Which VAT rate should I use when invoicing costs to the customer?

The VAT treatment depends on whether the cost is a pass-through expense, a recharge or a cost related to your own service.

Pass-through expense: Use the VAT 0% code and select the reason code “Official charges treated as pass-through expenses.”

Recharge: The VAT rate is often the same as on the original purchase invoice. However, you should not automatically copy the VAT treatment from the purchase invoice. For example, if the purchase invoice does not include VAT because the original seller is not registered for VAT, this does not necessarily mean that the recharge should be VAT-free in your company’s case.

Cost included in the main supply: Use the same VAT rate for the cost charged to the customer as for the actual work or service, regardless of the VAT treatment of the original purchase.

What should I do if I am not sure whether the cost is a pass-through expense?

First, check the original purchase invoice to see whose name it is in and who the purchase belongs to.

If the situation remains unclear, send us:

the original purchase invoice
the invoice issued to the customer or the planned charge
a short description of what was purchased and on whose behalf.

You can ask for help by emailing osakeyhtio@ukko.fi.

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