VAT treatment of re-charged expenses
If you’re a VAT registered business then it’s important to understand the VAT treatment of re-charged expenses and when to apply VAT to them. If you get this wrong it can cause problems.
Your re-charged expenses are likely to fall into two categories:
- Those costs paid for on behalf of your clients – these are known as disbursements.
- Those expenses incurred by you personally in the course of performing work for a client.
By default, you might assume the correct VAT treatment of re-charged expenses is to simply apply VAT on all of them.
However, if some of these re-charged expenses are considered to be disbursements, you won’t need to charge VAT on these.
What is a disbursement?
A disbursement is an amount of money paid on behalf of someone else for a supply which they receive.
For VAT purposes, these are treated as outside the scope and therefore no VAT is chargeable (refer to our earlier blog here).
HMRC stipulates in their guidance on the VAT treatment of re-charged expenses that in order to qualify as a disbursement (and not be chargeable to 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.
VAT treatment of re-charged expenses – problem areas
Lack of evidence to support authority/responsibility
If your business has no evidence to prove that you were either responsible for paying the expense or you had authority from the client to do so HMRC may argue that this is not a disbursement and VAT should be chargeable.
If you’re incurring costs on behalf of a client you should use a standard document which makes clear the limits of their authorisation.
Any disbursements should also be clearly identified on a VAT invoice and have no VAT applied.
Knowing what qualifies as a disbursement
Working out what counts as a disbursement causes problems for some businesses, particularly solicitors and consultants. Many businesses pay costs on behalf of their clients in the course of providing a service to them, for example:
- An IT contractor purchasing a web domain and hosting service for a client
- A solicitor paying land registry fees for a client
- An accountant paying courier charges on behalf of a client
If you work on the basis that costs you pay to help you deliver your service to a customer are not disbursements you’re unlikely to slip up.
For example, the following are not regarded as disbursements as they are viewed as component costs of making your VATable supply:
- Your postage costs
- Bank transfer fees
- Travel costs
What’s the advantage of a disbursement?
Treating an item as a disbursement is only VAT advantageous if your client is not VAT registered and there was no VAT on the expense in the first place. This is because if a disbursement includes VAT, then the gross amount would have to be passed to the client anyway - therefore a non-VAT registered client would be no better off.
In all other cases there is no difference, so therefore if in doubt the safest option is to treat the costs as a component of your VATable supply.
However, if your customer is VAT registered they should be able to recover VAT on a disbursement provided you obtain an invoice in their name and pass it on to them.
Is there a simpler alternative?
Yes. Where the costs include standard-rated VAT, you can treat a recharged expense as a “supply to and by” you.
This means, you treat the cost as made to you and recover the VAT, and then charge the amount to your client plus VAT. This makes accounting simpler and avoids the necessity of passing on invoices to VAT-registered customers.
Our eBooks cover this and many other topics. Check them out here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].