Disbursements
A very common query regarding VAT is “I pass on charges incurred on behalf of my client/customer – do I add VAT?” In other words, does the payment qualify as a disbursement?
Does it matter if the original supply has VAT on it?
Yes. Whether a payment is a disbursement is only a practical issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on “in the same state”. The points below assume that the charge in question is VAT free, eg; statutory fees (land registry, stamp duty, search fees, MOTs etc) insurance, financial products etc although benefits may also be obtained if the original supply is reduced rated.
So only if a supply is a disbursement can I pass it on in the “same state; ie; VAT free?
Yes
So when can I pass on a payment VAT free?
A disbursement is passed on without any alteration (eg; not marked up or changed in any way) and the supply must be to the final customer by the original provider. If the supply is VAT free then the recovery of the costs is also VAT free. The passing on of the payment from the final customer to the supplier is done as agent. Therefore, in these circumstances, a supplier may be acting as principal for part of a supply, and agent for another part. The disbursement should not appear on the “agent’s” VAT return.
When do I have to add VAT onto a supply which is originally VAT free?
When the onward supply is not a disbursement.
A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement. An example is zero-rated travel. A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge. It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his overall VATable service.
What are the rules for treating a payment as a disbursement?
The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:
- you acted as the agent of your client when you paid the third party
- your client actually received and used the goods or services provided by the third party
- your client was responsible for paying the third party
- your client authorised you to make the payment on their behalf
- your client 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 client
- you recover only the exact amount which you paid to the third party, and
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
What if I get it wrong?
If you add VAT to a properly VAT free disbursement HMRC will treat the amount shown on the invoice as VAT. However, it will not permit the recipient of the supply to recover input tax (as it is not VAT) thus creating an actual VAT cost. if you treat a supply as a VAT free disbursement when it actually forms part of your taxable supply, HMRC will issue and assessment and potentially penalties and interest. Unfortunately, I have seen this course of action taken a number of times and the amounts of VAT involved were significant.
Please contact us if you have any queries on this matter. Sometimes the matter is less than straightforward and getting it wrong can be very expensive for a business. If you have been charged VAT on what you believe to be a VAT free disbursement, it may also be worth challenging your supplier.
The latest case law on disbursements here Brabners LLP