Let's chat VAT. Despite VAT being around for 50 years, many business owners report to still being confused about their VAT obligations, which is understandable given the numerous and often complex applications of VAT across goods and services. In this series of short reads, we provides the essential knowledge and 'how to' guidance for some of your regular VAT queries .

VAT and disbursements

There are many words that are frequently used when describing transactions that may not have the same meaning in a VAT sense as they do in common use, and one of these is 'disbursement'.

This brief article is designed to provide the nuts and bolts on what a disbursement is for VAT purposes and how to identify one in practice. Please note that this is not intended to replace specific VAT advice, and you should contact a member of Price Bailey's VAT team if you are unsure.

Fundamental principles

Under specific circumstances, payments made on behalf of customers for goods and services they use can qualify as disbursements for VAT purposes. In such instances, however, VAT can neither be charged on customer invoices nor reclaimed on related purchase invoices.

Disbursements and recharges are often confused due to some apparent similarities, however they are separate concepts, and disentangling disbursements from recharges is vital to avoid potentially significant VAT-related consequences. The reason being that disbursements are not subject to VAT, while recharges are. Confusing the two could result in incorrectly charging (or not charging) VAT on a supply. This is especially important for businesses nearing the VAT registration threshold (£85,000), as misclassifying expenses could unexpectedly push you over the threshold, necessitating VAT registration. Hence, a clear understanding of costs and their proper treatment is of utmost importance for businesses.

To illustrate the difference between disbursement and recharges, let's consider an example.

Costs may be incurred that form a natural component part of a business's overall or underlying supply. These might be described as incidental, integral, or ancillary to the supply of that good or service. An example might be where public transport costs are incurred in order for a supplier to attend a meeting or site visit, and these are then recharged to the customer. They are consumed by the supplier in the course of making their onward supply to their client or customer and would form part of that overall supply and follow the same VAT liability of that supply (regardless of the fact that there may not have been any positive-rated VAT added to the purchase, e.g., train fare).

Where a cost is incurred that does not form part of that overall supply, it may be treated as a disbursement for VAT purposes, and no VAT is added when recharged. Such a cost would not be consumed by the supplier and would not form any incidental, integral, or ancillary part of that resupply.

When Does VAT Apply to Disbursements?

A supplier might act as an agent for a client when arranging a purchase, and it is that client who effectively buys and receives the goods/services, not the agent. If the supplier charges the client for these purchases, they might qualify as disbursements under the following circumstances:

  • The supplier acted as the agent, paying the supplier on the customer's behalf.
  • The customer benefited from the purchased goods/services.
  • The customer was responsible for payment, not the supplier.
  • The supplier had customer consent for payment.
  • The customer knew the goods/services were from a different supplier.
  • The invoice clearly segregates the cost.
  • The exact cost is transferred to the customer.
  • The goods/services paid for are supplementary to the supplier's offerings.

Establishing all these conditions, however, can be intricate. In cases where this isn't feasible, the charge is not a disbursement but instead becomes part of the supplier's overall supply, following the same VAT liability rules.

While the term 'disbursement' might appear misleading, careful consideration ensures that recharged costs align either with the overall supply's VAT liability or meet the disbursement criteria. If you encounter situations that warrant VAT clarification, the Price Bailey VAT team can assist in reviewing these scenarios.

Remember, the intricacies of VAT and disbursements can be complex, and seeking expert guidance can provide you with the clarity needed for confident decision-making.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.