Do you charge VAT on disbursements?
This is an area we get asked about frequently.
Many businesses make the mistake of thinking that expense recharges are disbursements and therefore they don’t include VAT on the sales invoice. As soon as we see this on sales invoices alarm bells start ringing and we know we have to break the news.
When a consultant or any other kind of business recharges the costs it has itself incurred in the course of providing its services to its customers, that recharge is not a disbursement.
As per HMRC guidance on disbursements in section 25 of Notice 700: The VAT Guide, a disbursement is the result of acting as a disclosed agent between your customer and a third party to facilitate a supply of goods or services between those parties, and the supply made must be used by your customer – not by you!
There are eight conditions which need to be met for a payment made to a third party on behalf of your client to be treated as a disbursement:-
- 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
Recharges of a business’s own travel, subsistence or other costs are not disbursements – the customer is not using the transport, eating the meal or doing the miles in the case of a mileage rate. The recharge is correctly treated as further consideration for the goods or services supplied.
Therefore you need to treat the sales invoice as your daily rate plus costs and VAT will apply.
