Some businesses pay costs on behalf of their clients – such as a conveyancing solicitor paying land registry fees. What’s the VAT position of these costs, what can you reclaim and when do you have to charge VAT?
What is a disbursement?
A disbursement is a sum of money which is paid on behalf of someone else for a supply which they receive. It is treated as outside the scope of VAT.
HMRC says that to qualify as a disbursement for VAT a payment must meet all the following conditions. It must be:
- For goods or services received and used by the client, not by the advisor, and which are clearly additional to those supplied by them.
- Shown separately on the advisor’s invoice as the exact sum paid out.
- Paid as the agent on behalf of the customer.
- A sum for which the customer was responsible to pay the third party.
- Authorised by the customer to be paid on their behalf.
- For a supply which the customer knew would be provided by a third party.
The key criteria are 1 and 2; 3 and 6 are automatic if 4 and 5 are met. The danger is that the agent may have no evidence of any such responsibility or authorisation.
Tip: If you are incurring costs on behalf of a client you should use a standard document making clear the limits of the authorisation.
A disbursement should be shown as a separate entry on a VAT invoice. For clarity, it is best to subtotal the sum subject to VAT, add the VAT and then add the disbursement underneath.
Working out what counts as a disbursement causes problems for some businesses, particularly solicitors and consultants. Some examples of disbursements are land registry fees, stamp duty, website hosting costs and MOT fees (but not repairs).
What doesn’t qualify?
Costs that you pay to help you deliver your service to a customer are not disbursements. For example, postage, bank transfer fees and travel are component costs of making your supply not disbursements.
Is a disbursement an advantage?
Treating an item as a disbursement only conveys a VAT advantage if the client is unregistered and there was no VAT on the expense in the first place. In all other cases it makes no difference, so if in doubt it is often safer to treat the costs as a component of your supply. If a cost includes VAT then the gross amount has to be passed on and an unregistered client would be no better off.
Tip: If your customer is VAT registered they can only recover VAT on a disbursement if you obtain an invoice in their name and pass it on to them.
Where the costs include standard-rated VAT, you can treat a disbursement as a ‘supply to and by’ you. In other words, you treat the costs as made to you and claim the VAT back and then charge it on to the customer plus VAT. This makes accounting simpler and there is no need to pass on invoice to VAT-registered customers.
The general rule is that disbursements are outside the scope of VAT and you should only include them on a separate line from taxable amounts on invoices. Alternatively, you can include the expense and input tax on your return and then charge the amount to the customer.