VAT - FRS with Disbursements

VAT - FRS with Disbursements

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A client is on Flat Rate Scheme (11%) and regularly buys supplies on behalf of customers which are used directly for the work she does for them. When billing the client she has previously charged 20% VAT as normal on her own self-determined labour cost and treated the supplies as a disbursement - charging the client the same amount she paid for the goods. On many occasions the initial goods bought from the supplier contained VAT so she took the gross amount as the disbursement amount to charge the client. She broke-down her sales invoices into labour (charging 20%) and materials (No VAT) elements. 

I'm not sure she fully met the criteria for disbursements as the goods were invoiced to her and paid by her and I don't think there was a written agreement that the ultimate liability with paying for the supplies was with the client. 

She also had a couple of issues with her sales invoices like where she inadvertently charged VAT to a customer on elements previously treated as disbursements which meant her client could claim for them on their VAT return. 

She's uneasy about using Disbursements as am I, so has asked whether she should just incorporate her full costs, decided what she wants to charge and then apply 20% on all of it. 

If she does this though, she is likely to pay out quite a lot in VAT and as she is on Flat-Rate, be disadvantaged - the bulk of her supplies are made-up of these goods for customers. 

Would it be best to advise her to withdraw from the Flat Rate Scheme or instead, to be aware of the 9% extra she will have to pay in VAT if she only charges her customer what she has paid the supplier and therefore to offset this by increasing her margin on labour?

Replies (3)

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RLI
By lionofludesch
11th Oct 2016 13:09

It's not 9% extra, it's 5.66667% extra.

Do you have a touch more detail about these disbursements? What's been bought? To whom are the invoices addressed? You've hardly mentioned the most crucial information.

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By Leonidas
11th Oct 2016 13:33

Sorry, I realised after posting that 9% was incorrect. How, though, have you calculated 5.67%?

In the main, her disbursements are made-up of display/decorative products used to showcase a clients visual display (window-fronts) etc. and she has charged for her own services separately. The invoices are made to her from the supplier with the items charged based on her client's requirements.

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Replying to Leonidas:
RLI
By lionofludesch
11th Oct 2016 13:50

20/(100+20%) x 100% - 11%.

You say the invoices are addressed to your client. They're not disbursements.

Your client must charge VAT, whether or not she charges a mark-up.

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