Interior Designer Business: Disbursement vs Recharged Arrangements

Running an interior design business involves more than just creating beautiful spaces. The operational dynamics of the industry can present challenges in maintaining accurate bookkeeping, particularly when the business is VAT registered.

While each business is unique, maintaining clear and consistent financial management practices is vital. This is particularly important for interior design businesses, as there are specific industry-related considerations that deserve attention. Let’s discuss some key points to keep in mind.

Understanding Charges and VAT Registration:

As an interior designer, you may charge clients for various services, such as design fees, commissions, project management fees, or procurement and sourcing costs. It’s crucial to be aware of the VAT registration threshold (currently £85k turnover) and how Making Tax Digital rules can impact your business and cash flow. Additionally, determining whether the goods you purchase for clients are disbursements or recharges is essential, as it affects your VAT position.

Disbursements:

Many interior design businesses purchase materials on behalf of their clients, acting as intermediaries between suppliers and clients. Properly managing the accounting for these transactions, especially regarding VAT, is crucial. Disbursement arrangements should meet the following criteria:

• The client has already made their product and material selections from suppliers before generating the purchase order.
• The purchase account and purchase order should be in the client’s name, including their contact details and delivery information.
• All purchase invoices received from suppliers must be addressed directly to your client.
• Your interior design business may pay the purchase invoice and subsequently create a disbursement invoice for the client to settle.
• Disbursement invoices should align with the supplier’s invoice, with no VAT charged or mark-up applied. Additionally, if your business purchases the materials and supplies, you cannot reclaim VAT, and it will not be considered part of your annual turnover.
• However, VAT registered clients can reclaim the VAT that is charged to them.

Disbursements offer advantages such as improved credit terms and potential trade discounts passed on to the client. The client remains the owner of the goods, and the contract stays between the supplier and the client.

Recharged Expenses:

Another arrangement involves the interior design business procuring materials on behalf of the client without specifying the exact items. Recharged expenses have the following features:

• Typically, the interior design business operates within a budget assigned by the client for the project.
• Materials are procured on behalf of the client, without the client necessarily specifying the exact items.
• The supplier’s purchase order or account is in the name of the interior design business.
• The sales invoice to the client includes the goods and materials purchased for the project that require reimbursement. This invoice incorporates a 20% VAT charge on all the “recharged” expenses. If the interior design business is VAT registered, the invoice will display costs net of VAT, along with the VAT amount if the transaction is transparent. If a mark-up is applied, the VAT charged will exceed the paid VAT amount.
• The interior designer is obligated to charge VAT on recharged expenses, irrespective of whether the original purchase included VAT, unless the interior designer is not VAT registered. Consequently, clients might end up paying more compared to being invoiced directly.

Managing VAT becomes increasingly challenging when undertaking projects outside of the UK. It is crucial to seek guidance from a VAT expert to thoroughly assess and comprehend the VAT risks involved when engaging in such projects.

Bookkeeping for Interior Design Businesses:

Running an interior design business can make bookkeeping complex. To simplify the process, it is advisable to use cloud-based bookkeeping software like Xero. These tools help streamline VAT compliance, cash flow management, and profitability tracking per project, especially considering HMRC’s Making Tax Digital rules. Equally crucial are internal process documents that outline the workflow for each task related to bookkeeping. These documents become even more vital if your interior design business experiences a high turnover of employees.

Bookkeeping software simplifies the finalisation and submission of VAT returns. The invoicing functionality is invaluable for accurate VAT accounting, whether through disbursement invoices or recharged expenses. The software automatically includes allocated expenses in the VAT report, ensuring accurate VAT return submissions.

Bookkeeping software integrates with your business accounts, providing real-time data to track cash availability. Regularly updating your records ensures an up-to-date picture of cash flow, and you can set alerts for low cash balances.

Determining the profitability of individual projects can be a complex task. However, by utilising bookkeeping software, you can effectively assign and monitor expenses and sales invoices associated with specific projects. This capability proves invaluable for conducting project reconciliation checks.

Choosing an accountant with a comprehensive understanding of the interior design industry is crucial. Not only will they ensure the accuracy of your management accounts and tax payments, but

they will also provide the clarity and support necessary for your designers to focus on what they love most: creating stunning homes, villas, hotels, boats, offices, and more.

At EOACC accountants and business advisors, we specialise in serving interior design clients. Our team is equipped to assist everyone from solo entrepreneurs starting their interior design businesses to established interior designers in need of a fully outsourced finance department.

Our expert outsourced finance team can handle all your general accounting and bookkeeping needs. This includes tasks such as preparing financial statements, submitting company tax returns, and managing payroll and VAT returns.

In addition to these essential services, our EOACC team offers valuable assistance in various areas, including:

1. Understanding VAT regulations for exporting products when you have projects in other countries.
2. Navigating the new VAT rules following Brexit regarding importing and exporting products to and from the UK.
3. Helping you comprehend and reclaim VAT with C79 documents.
4. Providing support in reconciling your procurement income and expenses between your accounting software and third-party interior designer project software, such as EstiMac.
5. Ensuring accurate recording of your income and expenses within the correct reporting period, while also helping you grasp your profit and loss statement.
6. If you run an online shop, we can assist in accurately recording income from both the shop and procurement sides. Furthermore, we can help account accurately for any profits made from bespoke products.

Just as interior designers are passionate about crafting beautiful and welcoming spaces and products, EOACC is passionate about delivering exquisite outsourced finance accounts and support.

Choose EOACC as your accounting partner and allow us to handle your financial matters with the same level of dedication and artistry that you bring to your design projects.