A Life in Tax: Understanding Pass-Through Costs: Tax Implications of Reimbursable Expenses (VAT & WHT Considerations). The Logistics Dilemma. It was a bright Monday morning when Ade, the finance manager of XYZ Logistics, received an email from a key client, Evergreen Industries.
The subject line read:
“Clarification on Reimbursable Costs and Tax Implications.”
Ade sighed. He knew this was going to be another deep dive into the tax complexities that businesses often overlooked. As a logistics provider, XYZ Logistics regularly incurred significant costs on behalf of its clients—shipping fees, port charges, and clearance duties—all paid upfront before seeking reimbursement. But the tax treatment of these costs was where the real challenge lay.
SEE ALSO: A Life in Tax: The Repayment That Wasn’t Just a Repayment
The Tax Conundrum
Ade picked up his phone and called his tax consultant, Chika, a seasoned tax professional with a reputation for untangling complex tax issues.
“Chika, I need your help. Our client is asking about pass-through costs—reimbursable expenses—and the application of VAT and WHT. I know we shouldn’t be paying tax on what is essentially a reimbursement, but I need a clear explanation that I can send to them.”
Chika chuckled. “Ah, the age-old debate! You know, this reminds me of the Brasoil case with FIRS. Let me walk you through it.”
What Are Pass-Through Costs?
Chika explained that pass-through costs, also called reimbursable expenses, are out-of-pocket costs incurred by a company on behalf of a client. These are not costs directly related to the company’s revenue-generating activities but rather costs temporarily borne and later recovered.
“Think of it like this,” Chika continued. “Imagine a logistics company paying port fees to clear goods for a client. The company does not provide a service in the traditional sense—it is merely fronting the cost, which the client later reimburses.”
“Okay, that makes sense,” Ade said. “But where does VAT and WHT come in?”
The VAT Perspective: What the Tax Tribunal Says
Chika leaned forward. “The VAT Act applies to the supply of goods and services. If a company is merely recovering an amount already paid to a third party, that’s not a supply of goods or services—just a reimbursement.”
“This was exactly the argument in the Brasoil Oil Services vs. FIRS case at the Tax Appeal Tribunal (TAT) in 2016,” Chika continued. “Brasoil argued that VAT should not apply to reimbursable expenses since no goods or services were being supplied.
The tribunal agreed, ruling that VAT was inapplicable to pure reimbursements. So, if you have proper documentation proving that these are third-party costs being recovered, VAT should not apply.”
“That’s a relief!” Ade said. “So, we don’t have to charge VAT on reimbursable expenses, as long as we can prove they are genuine third-party costs. What about WHT?”
Withholding Tax (WHT): Where It Gets Tricky
“Ah, WHT is where companies often get into trouble,” Chika replied. “The tax authorities usually scrutinize whether an expense is truly reimbursable or a hidden service charge. If there’s a markup—say, an administrative fee—then that portion is subject to WHT, because it is considered a service income.”
“In other words,” Chika continued, “If your invoice separates ‘reimbursable expenses’ and ‘service fees,’ WHT applies only to the service fee or markup. However, if everything is lumped together, tax authorities might argue that the entire amount is subject to WHT.”
Ade quickly jotted down notes. “So, if we clearly separate costs and provide third-party invoices, we can avoid unnecessary WHT deductions?”
“Exactly,” Chika confirmed. “Transparency is key. Clearly define reimbursable costs in your contracts and always keep supporting documents ready.”
Lessons from the Field
Ade smiled. The conversation had not only clarified his client’s concerns but also highlighted how tax laws, when misunderstood, could lead to unnecessary costs. Later that day, he sent the following response to Evergreen Industries:
Dear Client,
Thank you for your inquiry on pass-through costs (reimbursable expenses) and the application of VAT and WHT.
Reimbursable expenses refer to out-of-pocket costs incurred on behalf of a client, which are later recovered. Based on the 2016 Tax Appeal Tribunal ruling in Brasoil Oil Services vs. FIRS, VAT should not apply to these expenses since they do not constitute a supply of goods or services.
However, WHT applies only to the markup or service charge, not the reimbursable portion, provided third-party invoices are available to support the claim. We recommend that all reimbursable costs be clearly separated in invoices and contracts to avoid tax complications.
Best regards,
Ade
With that, Ade leaned back, satisfied. Another tax mystery solved—at least until the next email landed in his inbox.
Olatunji Abdulrazaq CNA, ACTI, ACIArb(UK)
Founder/CEO, Taxmobile.Online
