Agency and consultancy expenses in the UK: the complete guide

A UK agency’s costs are mostly people and software, and both have a rule that changes the answer. People: contractors who work through their own company bring the off-payroll working rules (IR35), and once your agency is medium or large, the status decision is yours. Software: the overseas tools an agency runs on carry no UK VAT on the invoice, but you still account for VAT under the reverse charge. Then there is the agency-specific question of rebilling: most recharged costs are part of your own supply and take VAT, and only a narrow class of disbursement does not. This guide walks through the whole ledger with a verdict before the detail. Every figure is sourced to HMRC and GOV.UK in the Sources section, retrieved 10 October 2026.

What this guide covers: contractors and IR35, the reverse charge on overseas software, rebilled costs and disbursements, entertaining clients and staff, the home office, equipment, staff costs, and the VAT and records that tie it together.

The agency’s ledger at a glance

The rest of this guide walks through each row, and every section opens with its verdict.

Where ExpenseFlow fits

An agency’s purchase ledger is contractor invoices, monthly SaaS receipts in dollars and euros, ad platform statements, travel and client lunches. ExpenseFlow captures each document (email forward, upload or phone), reads the line items, currency and VAT, codes each line with a written reason, and routes anything uncertain to a person before it posts. Its agency checks come from the rules on this page: a line that reads as a contractor, freelancer, consultancy or day-rate payment is flagged to check off-payroll working status, and a software, subscription or hosting line from an overseas supplier is flagged for the reverse charge instead of a VAT reclaim from the invoice. After approval the bill syncs to Xero with the source document attached, or to QuickBooks Online as a coded bill.

What it does not do: it never decides IR35 status, never issues a status determination statement and never computes the reverse charge on your return. The agency chart of accounts for Xero and for QuickBooks line up with the categories below.

The ExpenseFlow for agencies and consultancies page covers these checks across all five countries.

Contractors and IR35

The off-payroll working rules apply when a worker provides services through an intermediary, usually their own limited company. For medium and large clients, the client is in most cases responsible for determining the worker’s employment status, and should produce a status determination statement (SDS) with the reasons for its decision ^[1] . For small clients, the worker’s intermediary decides ^[1] . The rules took this form from 6 April 2021 ^[1] .

If the worker is deemed employed, the deemed employer must deduct income tax and employee National Insurance from the fees paid to the intermediary, and pay employer National Insurance and any Apprenticeship Levy ^[1] . An agency in the supply chain can be the deemed employer ^[1] . For an agency that places contractors with clients, that means the client’s SDS can turn your contractor invoice into a payroll item. A sole-trader freelancer invoicing in their own name is outside IR35 altogether; their status is a straight employment-status question.

Overseas software and the reverse charge

When the place of supply is the UK and your supplier belongs outside it, you, the customer, act as both supplier and recipient of the services ^[2] . You credit output tax on the full value in box 1, claim the input tax you are entitled to under the normal rules in box 4, and put the full value in both box 6 and box 7 ^[2] . If all of your input tax is attributable to taxable supplies, the reverse charge has no net cost; a business making exempt supplies pays the VAT as it would on a UK supply ^[2] . If an overseas supplier’s invoice does show UK VAT, it is UK VAT-registered and the invoice is treated like a UK one, so check which treatment the invoice shows before coding. The software and subscriptions guides cover deductibility, and the reverse charge glossary entry has the mechanics.

Rebilled costs and disbursements

Costs incurred in making your own supply to a client are not disbursements; they must be included in the value of that supply when VAT is calculated ^[3] . HMRC’s worked example adds £20 of expenses to an £80 fee and charges VAT on £100 ^[3] . Travel to a client meeting, stock imagery used in a campaign and the agency’s software seat all fall here.

A payment is a disbursement only if all of these hold: you acted as the client’s agent; the client actually received and used the goods or services; the client was responsible for paying for them and authorised you to pay; the client knew a third party would supply them; your outlay is separately itemised on your invoice; you recover only the exact amount you paid; and the goods or services are clearly additional to your own supply ^[3] . Keep the order form or copy invoice that supports it ^[3] . Media bought in the client’s name, at cost, itemised on your invoice, can qualify; a marked-up recharge of your own ad spend cannot.

Entertaining clients and staff

Business entertainment or gifts are not allowable as a deduction against profits, even when the cost is a genuine business expense ^[4] . Staff entertaining is allowable as long as it is wholly and exclusively for the trade and not merely incidental to entertaining customers ^[5] . On VAT, input tax on entertaining non-employees is blocked, entertaining staff is recoverable, an event for directors only is not input tax, and a mixed event of staff and clients is apportioned ^[6] . Entertaining overseas customers can be recoverable when reasonable ^[6] .

For the staff side, an annual party or function is exempt from tax and National Insurance for employees if it is open to all employees, annual (such as a Christmas party or summer barbecue) and costs £150 or less per person ^[7] . The rules also apply to online parties ^[7] .

The home office

Under simplified expenses, the flat rate is £10 a month for 25 to 50 hours worked at home, £18 for 51 to 100 hours, and £26 for 101 hours or more; you can only use simplified expenses if you work 25 hours or more a month from home ^[8] . The alternative is a proportion of actual costs. The home office guide covers both methods and the limited company position.

Equipment, travel and marketing

The annual investment allowance covers most plant and machinery up to £1 million a year, but not business cars ^[9] . Ad spend bought for a client and rebilled is your cost and your VAT-able supply, as above. The travel and equipment guides cover the detail.

Staff, VAT and records

For 2026 to 2027, employer Class 1 National Insurance is 15% above £96 a week ^[10] , and the Employment Allowance takes up to £10,500 a year off the bill ^[11] . Workplace pension contributions are at least 8% in total, with at least 3% from the employer ^[12] . You must register for VAT when taxable turnover over the last 12 months goes over £90,000, or will in the next 30 days ^[13] . The VAT and MTD guide, record-keeping guide and year-end checklist cover the rest.

Common mistakes

• Paying a limited-company contractor gross after a medium or large client’s SDS put them inside IR35 ^[1] .
• Leaving overseas software off the VAT return because the net effect is nil ^[2] .
• Treating marked-up recharges as disbursements and charging no VAT ^[3] .
• Reclaiming VAT on client lunches ^[6] .
• Treating a staff party over £150 a head as exempt ^[7] .
• Using the home office flat rate below 25 hours a month ^[8] .