The Same Question, Twice in One Week
I had the same conversation with two different subcontractors this week. Both of them recharge costs to the people they work for, materials, parking, that sort of thing. Both were getting it wrong on their tax return, just in opposite directions.
If you ever buy something for a job and add it onto your invoice, this one's for you.
What's Supposed to Happen
Recharge a cost to a client, and two things have happened, not one. You've made a sale, because you've been paid back. And you've had an expense, because you spent the money in the first place.
Those two should cancel each other out. The sale adds to your income, the expense takes it straight back off your profit, and you end up exactly where you started. No better off, no worse off, because the money only ever passed through you on its way somewhere else.
That's the bit both Dan and Mia missed.
Dan's Mistake: Paying Tax on Money That Isn't His
Dan buys a bag of fixings for £40 and adds it onto his invoice. He gets paid, the £40 lands in his bank with the rest of the invoice, and it all gets recorded as income. Fine so far. But Dan never records the £40 he spent as an expense. In his head, it "wasn't really his money" so it didn't need to go anywhere.
HMRC only sees one side of that story: £40 of income, nothing to offset it. As far as your tax return's concerned, that's £40 of pure profit. You'll pay Income Tax and Class 4 National Insurance on it, even though you never kept a penny of it.
Every pound of recharged expense you forget to claim is a pound you're taxed on that you never actually made.
What It's Actually Costing You, Per Pound
For 2026/27, Class 4 National Insurance is 6% on profits in the basic rate band, 2% above that, and it stacks straight on top of Income Tax. So the real damage isn't 20p or 40p in the pound. It's more.
| Recharged expense missed off your return | Basic rate: tax (20%) + Class 4 NI (6%) | Higher rate: tax (40%) + Class 4 NI (2%) |
|---|---|---|
| £1 | 26p | 42p |
| £50 | £13 | £21 |
| £100 | £26 | £42 |
| £500 | £130 | £210 |
| £1,000 | £260 | £420 |
A basic rate taxpayer loses 26p in every pound of unclaimed expense, not 20p. A higher rate taxpayer loses 42p, not 40p. That's over a quarter gone on a basic rate return, and nearly half on a higher rate one. And it doesn't come back. There's no box to claim it later once the year's gone by, you either claim the expense on the return it belongs to, or you lose it for good.
Mia's Mistake: Under-Declaring Turnover
Mia recharges materials too, but she does the opposite of Dan. She doesn't record the recharge as income or as an expense. In her head, the money's just visiting, it comes in, it goes straight back out, so it never really counts as part of her business at all.
The tax side of that cancels itself out, since neither entry gets made. But it creates a different problem: it means Mia's under-declaring her turnover. And turnover, not profit, is what matters for VAT registration.
The VAT threshold is £90,000 of taxable turnover in any rolling 12-month period, and that includes everything you've sold, recharges included. Leave thousands a year of recharged materials out of your turnover, and you could be over the threshold without realising it. Registering late isn't just a telling-off either, HMRC can charge penalties based on how late you were and how much VAT should have been charged in the meantime.
Two Mistakes, Same Root Cause
- Both come from treating a recharge as "not really income"
- Dan's version overpays tax and NI on money he never kept
- Mia's version under-declares turnover and risks a late VAT registration
- Neither shows up until someone actually checks the figures
- The fix for both is exactly the same
How to Get It Right
Record the recharge as a sale, in full, every time. Claim the matching cost as an expense, in full, every time. Your profit ends up right, because the two sides cancel out. Your turnover ends up right too, because the sale was never left out to begin with.
Have a look back through your invoices for anything you've charged a client on top of your normal rate, materials, parking, congestion charge, tool hire. For each one, ask yourself: has that amount gone into my income, and has it also gone into my expenses?
A recharge that never gets recorded properly is a bit like a takeaway that never turns up. You've still paid for it, you just haven't had the benefit.