VAT disbursements

VAT disbursements

There are quite a few terms that are used in common parlance and specifically in accountancy-speak that may not have the same meaning in the world of VAT. One of these is VAT disbursements. When a business incurs costs it will usually look to recharge those costs to clients and customers, either directly by listing them on the invoice raised to the client or customer, or indirectly by including them in their overall charge. It is when these costs are separated out that the question arises of whether to add VAT or not.

In short when a cost has been incurred in the course of making a single supply to the end customer then it would probably not be a disbursement for VAT purposes, and so it would follow the same liability as the underlying supply. A useful word to refer to here is ‘consumed’ – if the bought-in item (whether it’s goods or services) has been consumed in the making of the onward supply then it is unlikely to be a disbursement in VAT terms. Examples of this would be postage costs, transport, accommodation and subsistence – VAT would be added even if there was no VAT charged on the original cost, for example train fares.

Conversely if a cost has been incurred on behalf of the customer then it may be recharged as a disbursement, and no VAT applied to it. This can be more difficult to confirm, but HMRC provide a useful guide to when they believe this can apply. They indicate that all of the following must apply;

  • the supply was paid for with the business acting as the agent for the customer;
  • the goods or services paid for were received or used by the end customer;
  • if the business hadn’t paid for them it would have been the customer’s responsibility to make the payment;
  • the customer agreed that the business would make the payment on their behalf;
  • the customer knew that there was a third party making the supply, not the business itself;
  • the charge was separately identified on the invoice to the customer;
  • the exact cost was recharged, i.e. no mark-up;
  • the recharge was for supplies in addition to the underlying service provided.

It used to be the case that a good example of disbursements was when a solicitor incurred land registry fees when conveyancing a property, however this was challenged recently in a case involving the firm Brabners when HMRC argued that the title searches and reports were actually used by the firm as part of their overall supply of advice to their client. On this basis instead of being a disbursement (no VAT added) they were ‘consumed’ costs, and so VAT had to be added.

If you would like specific guidance on your disbursements please get in touch: