Expenses and disbursements
Andrew Needham looks at the VAT treatment of expenses and disbursements.
The area of what is a VATable expense and what is a disbursement has caused businesses a lot of confusion over the years, as an examination of the tribunal records will confirm.
What is a disbursement?
A disbursement is a sum of money which is paid on behalf of someone else for a supply which they receive. A disbursement is treated as outside the scope of VAT.
HMRC say that, to qualify as a disbursement for VAT purposes, a payment must meet all the following conditions. It must be:
- for goods or services received and used by the client, not by the adviser, and which are clearly additional to those supplied by them;
- shown separately on the adviser’s invoice as the exact sum paid out;
- paid as the agent on behalf of the customer;
- a sum for which the customer was responsible for paying the third party;
- authorised by the customer to be paid on his or her behalf;
- for a supply which the customer knew would be provided by a third party.
A disbursement should be shown as a separate entry on a VAT invoice. For clarity, it is best to subtotal the sum subject to VAT, add the VAT, and then add the disbursement.
What is a, and what is not, a disbursement causes a lot of problems for some businesses, particularly solicitors and consultants. Here are some examples of what are disbursements:
- Land Registry fees
- Stamp Duty
- postal property searches (but not personal or electronic searches)
- website hosting costs
- MOT fees
- Road Fund Licences supplied with a car
What doesn’t qualify?
There are many incidental costs that a business might incur that can't be treated as disbursements when invoicing a customer, for example postage, traveling and subsistance ecxpences ect. Any costs that a business incurs itself in the course of supplying goods or services to customers are not disbursements for VAT purposes. It's the business, and not its customer, that purchases the goods or services, which are supplied to and used by the business. These should properly be classified as recharges.
Is a disbursement an advantage?
Treating an item as a disbursement only conveys a VAT advantage if the client is unregistered, and there was no VAT on the expense in the first place. In all other cases it makes no difference so if in doubt it is often safer to treat the costs as a component of your supply.
If a cost includes VAT then the gross amount has to be passed on and an unregistered client would be no better off. If the customer is VAT registered they can only recover VAT on a disbursement if you obtain an invoice in their name and pass it on to them.
Recharging expenses and accounting for VAT
Even the recharging of expenses can cause confusion for businesses. Businesss have to remember that even if they do not pay VAT on the epense themselves they will still have to charge VAT on it when they charge it on (assuming they are making a standard rated taxable supply). So when seperately itemising expenses such as milage expences, train and air travel, postage or purchases from unregistered businesses on your sales invoice you still have to charge VAT on them.
When reviewing a client’s records always take a good look at disbursements as HMRC will, and ensure that they are being treated correctly. Pay particular attention to how solicitors treat expenses and disbursements, as these can cause confusion. If in doubt, treat it as a component cost and charge VAT on it.
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