May 3rd, 2017
VAT on recharges – what’s right?
The rules covering VAT on recharges are often misunderstood. Here’s an example.
Jackie Limited provides cleaning services and her staff travel to the clients premises in their own vehicles and make a claim for mileage from Jackie Limited.
The customer is charged both for the cleaning and for the mileage costs, at the same rate per mile as the worker claims from Jackie Limited. A customer has said that the mileage is a disbursement and should not be charged with VAT on it, although the actual cleaning services are standard- rated. Is this correct?
The answer?
The mileage costs don’t qualify as a disbursement for VAT purposes. Instead they are a cost component, incurred by the client in making the supply of the cleaning services and so must be included in the value of those supplies when VAT is calculated and charged at the same rate as the main supply.
For a recharge to qualify as a disbursement and be outside the scope of VAT, the following conditions (reproduced in s.25 VAT Notice 700) should be met:
- you acted as the agent of your customer when you paid the third party;
- your customer 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 customer 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 customer authorised you to make the payment on their behalf;
- your customer 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 customer;
- 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 customer on your own account;
All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes.
If you need any further help with VAT the don’t hesitate to get in touch.
