VAT on disbursements
The treatment of ‘disbursement’ items recharged to clients is a contentious area of VAT and one that is frequently misunderstood. If an item is a true disbursement, no VAT will apply and you can simply reimburse for costs incurred. Where costs form part of a service you are providing, then VAT may need to be applied.
The concept that causes most confusion are zero rated costs such as travel, which are then recharged. Clients typically detail these costs separately from their main service on an invoice and then deliberate for some time whether they need to charge VAT on a supply that was zero rated.
To understand if a cost is a true disbursement, or simply an additional cost of providing the service is at the heart of the treatment for VAT.
Put simply, the VAT status is dependent on who is supplying what, to whom, for what consideration, regardless of the VAT status of the rechargeable cost.
HMRC kindly provide guidance on how disbursements are to be identified, however this guidance has no explicit reference in UK law. It is simply understood that consideration for your supply is taxable, and disbursement payments are not deemed consideration for your taxable supply.
Agency is key, in the true sense, whereby not only do you incur cost on behalf of a client, but the client has direct use or enjoyment of the service or product.
HMRC guidance tells us we may treat a payment to a third party as a disbursement for VAT purposes if all of the following conditions are met:
- you acted as the agent of your client when you paid the third party
- your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
- your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client)
- your client authorised you to make the payment on their behalf
- your client knew that the goods or services you paid for would be provided by a third party
- your outlay will be separately itemised when you invoice your client
- you recover only the exact amount which you paid to the third party
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account
Generally, it’s only advantageous to treat a payment as a disbursement for VAT purposes where no VAT is chargeable on the supply by the third party, or where your client isn’t entitled to reclaim it as input tax.
It’s worth noting that if you treat a payment for a standard-rated supply as a disbursement for VAT purposes, you may not reclaim input tax on the supply because it hasn’t been made to you. Your client may also be prevented from doing so because the client doesn’t hold a valid VAT invoice. However there is an agreed concession between ICAEW and HMRC for invoices to be amended with the client details in respect of certain professional fees. Outside of this it is wise to get rechargeable costs invoiced in the name of the client.
Even for disbursement you will need to keep evidence to support your VAT treatment as this will demonstrate you were entitled to exclude the payment from the value of your own supply to your principal. You must also be able to show that you didn’t reclaim input tax on the supply by the third party.
As you can see, once again VAT gets us scratching our heads. It is essential you understand how to invoice correctly, not only for the services you are providing, to each individual client, but also how to recharge expenses.
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