Is Disbursement treatment for VAT obligatory?

Is it mandatory to treat expenses as "Disbursements" if they meet HMRC tests?

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We incur certain costs which meet all of HMRC tests to qualify for treatment as Disbursements but they arise so infrequently that we have no process to adopt this treatment in our invoicing and VAT accounting.  We already exclude any VAT on these costs from our input VAT calculations, so we are not taking any undue benefit. At present we will be recharging these costs with our own output VAT calculated based on the Gross cost incurred from the original supplier.  Our customers are all fully VATable and so I don't see any real gain or loss to any party on this point.  

I am struggling to identify if it is mandatory to adopt the treatment of onward invoicing of these costs as "Disbursements", or if that is an optional treatment.  

Any thoughts or guidance? 

Replies (6)

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RLI
By lionofludesch
17th Oct 2019 16:08

Your customers will not be able to reclaim the VAT on these disbursements from HMRC as it has been incorrectly charged.

The VAT treatment isn't a matter of choice for your convenience. There are rules.

Lots of businesses sell goods and services at different rates and cope very well.

Why are you special ?

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Replying to lionofludesch:
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By bob1234bob
17th Oct 2019 16:27

HMRC Manual:

"Disbursements: costs to exclude from VAT calculations
A payment made to suppliers on behalf of your customers is called a ‘disbursement’ if you pass the cost on to your customers when you invoice them.

You *might* be able to *leave out* these payments from your VAT calculations because it’s the customer, not you, who buys and receives the goods or services; you’re just acting as their agent".

The use of the language *might* and *leave out* in the HMRC guidance implies some degree of choice. Compared to the language in the same manual

"What isn’t a disbursement
................... If you do show them separately when you invoice your customers they’re known as ‘recharges’, and not disbursements. You’ll *have to* charge VAT on them whether you paid any VAT or not."

This language makes it clear that we are obliged to charge VAT on recharges which are not disbursements.

Why doesn't the manual say

"If you meet the conditions you *must exclude* these payments from your VAT calculations because it’s the customer, not you, who buys and receives the goods or services; you’re just acting as their agent".

I assumed that HMRC were being deliberate in the way that they used the language.

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Replying to bob1234bob:
RLI
By lionofludesch
17th Oct 2019 17:54

bob1234bob wrote:

I assumed that HMRC were being deliberate in the way that they used the language.

Well, that's what you get for relying on a manual written in a conversational tone.

VAT is a tax on supplies you make. So what supply have you made in connection with these disbursements ? You've not said what they are so we're working in the dark. NOr do we know whether there's ten bob or ten grand at stake.

If you've made a supply, then it's not a disbursement in the first place.

If you haven't made a supply, there's nothing on which to charge VAT. Your customer has no claim to input tax and his remedy is to recover it from you, not HMRC.

It's hard to avoid the conclusion that you're just being a bit lazy here.

Your suggestion relies on all your customers being able to recover the VAT in full. But the SDLT example is a good one. If a client is paying, say £5000, for SDLT, they're not going to be too happy if you charge them an extra £1000.

So - are you going to be checking whether your customers are VAT registered ? Not partially exempt ? Or just assuming that everyone's fine ?

As a wise man once said, "Everything's fine until it all goes wrong."

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By MJShone
17th Oct 2019 16:47

Lion is right - the treatment isn't a matter of choice. It depends on the circumstances.

You quote: "You *might* be able to *leave out* these payments from your VAT calculations because it’s the customer, not you, who buys and receives the goods or services; you’re just acting as their agent"

What that means is IF you are acting as agent for the customer, not principal, then you don't treat the expense as a disbursement. There are likely to be very few instances where you are acting as agent rather than principal, depending on your business. Solicitors, for example, often pay stamp duty land tax on behalf of their clients. The liability to SDLT is the client's, as purchaser of the property and the solicitor is clearly acting as agent, rather than principal, in paying it. On the other hand, the solicitor might order various searches as part of his work in checking that eg there's no right of way through the garden of the property the client's buying that means the garden will be full of ramblers every weekend. The solicitor needs that search to do his job properly - he doesn't just pass it on to the client without comment. In that case, the solicitor is acting as principal, not as agent, so the cost of the search is a disbursement on which he must charge VAT.

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By paulwakefield1
18th Oct 2019 09:14

Does this from VTAXPER37000 not indicate either treatment is possible?

" Although agents are not required to treat supplies of services they arrange as made to and by them, they have the option of doing so in certain circumstances under the terms of section 47 of the VAT Act 1994. If you are satisfied therefore that your trader is acting as an agent in respect of a supply of services and the conditions set out in VTAXPER36900 are met, he may choose between two courses.

He may use the invoicing provision of section 47(3) of VAT Act 1994 and treat the supply as to and by him.
Alternatively, he may stand aloof from the transaction, simply allowing it to pass through his hands and informing his principal of the value to be invoiced or paid. Under this procedure, the ‘disbursement procedure’, which is explained at VTAXPER38000, input and output tax remain the sole responsibility of supplier and customer, with the agent charging VAT on the value of his own services.

Also this from the more conversational VAT 700: It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.

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By MJShone
18th Oct 2019 15:27

Sorry bob1234bob, I should have read the question properly. I saw "disbursements" and went on my usual path...

If you've paid VAT on the cost yourself, you'll obviously charge the client VAT when passing on the costs.

What about situations where you yourself haven't paid VAT (eg postage). If you're acting as principal, you must still charge the client VAT when you pass on the costs even though you haven't suffered VAT yourself. If you're genuinely acting as agent for the client, you don't have to charge the client VAT.

If what you're saying is that your default position is that you will always charge the client VAT, whether you yourself have been charged VAT or not, then that's fine. paulwakefield1 sets out the authority for doing this.

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