Simplifying VAT and Disbursements: A Beginners Guide for Businesses

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Understanding business expenses and how they relate to VAT can be confusing. Let’s break it down in simple terms, focusing on disbursements and recharges.

What Are Disbursements and Recharges?

Disbursements are expenses you pay on behalf of your customer, acting as their agent, and charge them for it later. On the other hand, recharges are costs you incur while providing a service, but your client has agreed to pay for them.

From a VAT perspective, the difference is important. If they are classed as disbursements, here’s what you need to know:

  • You don’t add VAT when you bill your customer.
  • You can’t reclaim VAT on these payments.

Examples of Disbursements

To qualify as a disbursement, these conditions must be met:

  • You act as an agent for your client while making the payment.
  • Your client directly benefits from the goods or services paid for.
  • The payment is the client’s responsibility.
  • Your client is aware that the goods or services come from another supplier.
  • The costs are clearly detailed on your invoice.
  • You pass on the exact cost to your client when billing.

Some examples include:

  1. Website Hosting Purchased on Behalf of Client: Imagine you purchase a website hosting package for a client on their behalf and then bill them for the cost. This would be considered a disbursement.
  2. Third-Party Services for Client: If you arrange and pay for a specialized service (like legal consultation or marketing services) on behalf of your client, and pass on the cost to them, it’s a disbursement.
  3. Stamp Duty paid on behalf of client: A solicitor pays stamp duty land tax on behalf of a client – a clear disbursement as it’s the client’s responsibility.
  4. Companies House fee for filing: An accountant completes an annual return for a corporate client and recharges the filing fee. If itemized separately on the invoice and no profit is added, it’s a VAT-free disbursement.

Remember, for a payment to qualify as a disbursement, it needs to meet specific criteria, including acting as an agent for your client and ensuring your client receives, uses, or benefits from the goods or services you paid for on their behalf.

What About Reimbursements/Recharges?

When you include the cost of supplies in your charges to a third party, it’s considered a reimbursement. For example, if you travel to see a client, the travel costs are a reimbursement and subject to VAT.

What’s Not a Disbursement? Some costs your business incurs must be included in VAT calculations. These are costs that your business incurs when supplying goods or services to your customers, and do not class as disbursements for VAT. You are buying the goods and services for use in your own business, examples of these include travel expenses and your own postage and delivery costs.

A case of search fees: disbursement? In the case of Brabners LLP v HMRC (2017), the court examined whether electronic property search fees should be treated as disbursements (not subject to VAT) or as part of overall client bills (subject to VAT). The outcome was that these search fees were not considered disbursements because the solicitors utilised the information as part of their service and advice to clients. If the solicitors simply passed on the fee without analysis or comment, HMRC confirmed that VAT would not apply. However, if the fee was linked to providing advice or a report based on the search, it would be considered part of the charges for the services, thus subject to VAT.

How to Show Disbursements and Recharges on Invoices

So if the cost is indeed a disbursement, you must list them separately on your invoices. For example:

  • Design services: £2,500
  • Travelling expenses: £300
  • Amount on which VAT is due: £2,800
  • VAT at 20%: £560
  • Disbursements: £150
  • Total including VAT: £3,510

Claiming Back VAT

You can claim back VAT on items you paid for if they were supplied to you and not your client. However, you can’t claim VAT back if you treated it as a disbursement for VAT purposes and didn’t charge VAT to your customer.

Remember to keep records like order forms and invoices to support disbursements and ensure compliance with VAT regulations.

Understanding VAT and disbursements is vital for managing your finances efficiently. If you need further assistance or have questions, feel free to reach out. We’re here to help!

You can read the HMRC guidance on this subject here.

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