In the October/November issue we examined how important it is not to discuss pricing with your competitors and I promised to delve further into the vexed topic of pricing. This time we’ll look at some of the issues around quoting and invoicing your fees/prices.
The over-arching principle is that prices need to be honestly quoted and charged. That sounds trite, I know, but delving a little deeper, there is quite a lot to it.
Let’s say you are a service provider – say a PCO or event manager. You charge a fee agreed with your client as a fixed sum. You quote your fee for managing an event or conference at, say $30,000.00 plus certain expenses to be reimbursed by the client at cost. In this issue we’ll start the ball rolling by considering GST. It is always better to quote your prices inclusive of GST. So in this case, the better approach would be to quote the fees as “$33,000.00 (including GST). No-one can complain that they were misled or deceived.
In some cases, where you are supplying goods or services of a kind ordinarily acquired for personal, domestic or household use or consumption, this is required by a specific provision of the Australian Consumer Law (not as many think, in the GST tax legislation). In such cases, if you quote $30K and charge $33K, you’ll commit an offence (for which severe penalties apply) and the client will be entitled to pay you the lower amount anyway.
Extraordinarily, after 15 years of living with the GST there is still reluctance on the part of many businesses to quote prices inclusive of GST because it makes the price appear higher. But we get it! We know you aren’t getting that extra 10 per cent and that it’s going to Canberra (then, supposedly, to the states, if you can believe them). We also know that when we pay a business expense, we get the GST back as an input tax credit. So why all the fuss? – quote GST inclusive!
Let’s move on… Where I see a lot of businesses get confused is over the issue of GST on expenses that are to be reimbursed by their clients.
In our example, you are charging your fee ($33,000 incl GST) and for agreed expenses “at cost”. Let’s imagine that you have an expense that you are entitled to pass on to the client, say, travel and accommodation costs that come in at a nice, round $1,100.00 – including GST of $100.
How much do you charge your client – $1,000 or $1,100? I know of many businesses that charge the higher amount – so that the client is asked to “reimburse” the GST as well as the expense.
If the contract says that the client must reimburse the expense at cost and the supplier is getting a refund of or credit for the GST component, how can that component be considered part of the expense? In my view, in such cases the supplier is really getting a margin on the expense, since the supplier also gets the original GST back from the ATO, as an input tax credit. Arguably that margin is part of the supplier’s fee income – with all attendant tax consequences.
Yes there is a cash-flow issue because the input tax credit does not accrue until the next BAS statement is lodged… but if you are getting the tax back, how can that truly be an “expense” that the client must reimburse? It just doesn’t pass the “sniff test”. In my view charging the client for the GST on an expense is at best a windfall gain and at worst, a case of “double-dipping”. It could be a breach of the contract with the client if the client’s obligation is to reimburse “expenses” or “at cost” and, moreover, it could be misleading and deceptive conduct.
You may even have seen the clause – many contracts for the supply of services say that where an expense is to be reimbursed it must be reimbursed net of any input tax credit that the supplier will receive – ie: the supplier cannot charge the client for the GST where the supplier will get it back from the ATO. Even if such a clause is not in your contract, I still consider it to be inappropriate to be charging GST on reimbursable expenses for the reasons noted above.
Next time we’ll have a look at price estimates and variations and the necessity of ensuring that you articulate the scope of work properly, so that you don’t get stung by a client that wants to hold you to your original quote.