Charging VAT on expenses: disbursements vs. recharges
Posted on 18th April 2019
When you carry out services for a client or customer, you may incur some costs to be able to provide that service. These could be purchasing a particular software package, or travel costs to attend their office. Hopefully, you have agreed with your client or customer that you will pass on those costs to them on your invoice. However, if you are VAT registered, it can be confusing understanding when and how VAT should be charged on these additional invoice items. To understand this, you need to understand the difference between disbursements and recharged expenses.
It can be a bit tricky trying to get your head around disbursements and recharged expenses – even as a seasoned business owner with years of experience. As such, this blog post has been created to help you understand when you should charge VAT on costs you pass to your clients or customers, and when such payments can be treated as disbursements, and when a payment can be regarded as a rechargeable expense.
What can be classed as a disbursement? And what can be classed as a recharge?
A disbursement is a purchase of goods or services which your customer or client then receives, uses or benefits from. This can be anything from a website hosting package or business-related books that your client has requested, to land registry fees or stamp duty on your client’s purchase of a property (if you are a solicitor, for example).
Something that you buy to enable you to carry out your work for your client or customer cannot be treated as a disbursement, but a rechargeable expense. This could include travel costs when attending a business-related event, or postage fees for sending documents to your clients.
Invoicing for rechargeable expenses
If you invoice your client or customer for expenses incurred whilst carrying out your usual work duties as a contractor, the most common and simplest method of billing is to add on VAT to the expenses incurred, whether you paid VAT on them or not.
You issue an invoice for £1,000 net for billable work carried out by yourself. You also paid £180 (including VAT) for a hotel bill to attend an industry event, which your client has agreed to pay for. On the invoice, you must include the hotel expense of £180 with VAT added on – even though the VAT was already included in the cost of the hotel bill. The invoice would look like this:
Work done: £1,000
Expenses – hotel cost: £180
Net invoice: £1,180
VAT at 20%: £236 (20% of £1,000 = £200; 20% of £180 = £36)
Gross invoice: £1,416
Sometimes, an organisation may not want you to invoice them using the above method because they do not want to allow the cost of additional VAT. When this happens, you would have to split the VAT component of the invoices – this is called ‘splitting out VAT’.
Using the same example as above with the train ticket, the invoice would look like this:
Work done: £1,000
Expenses – hotel bill: £144 (£180 less 20% VAT)
Net invoice: £1,144
VAT at 20%: £228.80 (£200 on work done and £28.80 on hotel bill)
Gross invoice: £1,372.80
Invoicing for disbursements
As previously mentioned, when purchasing goods or services for your client or customer and passing these costs onto your client or customer, you can sometimes leave these payments from the VAT calculation.
This would mean that it is technically the client or customer who is making the purchase and receiving the goods or services, rather than you. You are simply acting as the go-between.
This type of transaction is known as a disbursement for VAT purposes, and must be treated as such.
To be sure that the payment definitely meets the requirements to be treated as a disbursement, it should meet all of the following conditions:
You had your client or customer’s permission to make the payment;
Your client or customer was aware that you were acting as an ‘agent’ of theirs;
Your client or customer received or used the goods or services, or benefitted from the purchase of them;
It was the responsibility of your client or customer to make the payment for this purchase;
Your client or customer was fully aware that the goods or services received were not from you, but from an external supplier;
The good or services purchased are an additional expense to the amount you are billing your client or customer for carrying out the work yourself;
The exact amount of the goods or services purchased is added to the bill when you invoice your client or customer;
The costs of the goods or services purchased is clearly outlined on the bill to your client or customer in a separate line or section to other costs.
It should be noted that treating a transaction as a disbursement payment for VAT purposes is normally only ever beneficial either when the supplier did not charge VAT on it, or if your client or customer cannot claim back the VAT on it – i.e. they are not VAT registered.
You issue an invoice for £1,000 net for billable work carried out by yourself. You also paid £250 for a website hosting package on your client’s behalf. The invoice would look like this:
Work done: £1,000
Net invoice: £1,000
VAT at 20%: £200
Gross invoice: £1,450
When can you claim back VAT? (And when can you not?)
You can claim back VAT when you have charged your client or customer VAT on items you have paid for and supplied to them. Whether or not you issued these costs to them as recharges or disbursements does not matter. For each item you wish to claim VAT back on, you will need a VAT invoice. If your client or customer is VAT registered, they will also be able to claim back the VAT you charged them.
If you purchased goods or services from a VAT-registered supplier on your client or customer’s behalf, you may have paid VAT on this purchase. Unfortunately you cannot claim this back, as the goods or services were supplied to your client or customer’s business rather than your own, and you would have treated this transaction as a disbursement for VAT purposes when you invoiced your client or customer. This means that your client or customer will also be unable to claim back VAT, as they will not have a valid VAT invoice.
We are VAT experts and can help you with all aspects of this well-known (but not so much loved!) subject. Whether you’re wondering whether you should register for voluntary VAT, or if you’re about to hit that all-important threshold, we can help you make the right decisions and handle the process from start to finish. We have a great blog post here about invoicing as well, which may help you ensure you are including all the right things on your invoices – but if you are fed up with the admin and paperwork, we’re happy to take this off your hands.
Nicola J Sorrell -
Founder | Xero Champion | IR35 Expert
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