Exploring disbursements from a VAT perspective

Exploring disbursements from a VAT perspective

In the world of VAT, there are many words that do not follow their normal everyday meaning.  Disbursement is one of those. 

A simple explanation is that payments made on behalf of customers for goods and services for their use can be treated as disbursements for VAT purposes in certain circumstances. When this is the case, it means:

• VAT is not to be charged on customer invoices
• VAT can’t be claimed back

It is commonplace for disbursements to be complicated with recharges, but getting these mixed up can be costly from a VAT perspective. This is because disbursements fall out with VAT while recharges are subject to VAT. For businesses that are close to the VAT registration threshold (£85,000), categorising expenses incorrectly could lead to this threshold being passed suddenly and VAT registration being required. It is subsequently crucial that businesses have a firm grasp on their costs and how they should be treated.

In this insight, we explore what a disbursement is for VAT and how to identify one in practice.

Disbursements v recharges

Simply, and as alluded to above, a disbursement is defined by HMRC as ‘a payment made to suppliers on behalf of customers’. A recharge is an expense incurred when business services are performed but it has been agreed that these will be paid for by the customer. 

When to treat a payment as a disbursement

If a supplier acts as an agent for a customer, then it is the customer that purchases and receives the goods/services, not the agent. In this case the cost of the recharges can be recorded as disbursements where the conditions below are all satisfied.

1. You paid the supplier on your customer’s behalf and acted as the agent of your customer
2. Your customer received, used or had the benefit of the goods or services you paid for on their behalf
3. It was your customer’s responsibility to pay for the goods or services, not yours
4. You had permission from your customer to make the payment
5. Your customer knew that the goods or services were from another supplier, not from you
6. You show the costs separately on your invoice
7. You pass on the exact amount of each cost to your customer when you invoice them
8. The goods and services you paid for are in addition to the cost of your own services

Where it is difficult or all of the above conditions cannot be satisfied, the recharge would normally not be a disbursement.  It would simply form part of the supply made by the agent to the client (and follow the same VAT liability).

Case study: Brabners LLP v HMRC

It was ruled in the Brabners LLP v HMRC case that online property searches purchased by a firm of solicitors were consumed by the solicitors and formed an incidental part of the solicitors’ services to its clients.  The charges could not therefore be treated as disbursements. As the solicitors underlying supply was VATable, the recharges followed the same VAT treatment and they were ordered to pay almost £68,000 in VAT.

We are here to help

The term ‘disbursement’ can be misleading from a VAT perspective, and it is often misunderstood.  Care should be taken to ensure that recharged costs are included within the primary charge (and follow the same VAT liability) when they are incidental, integral, or ancillary to that supply.  They can only be recorded as disbursements (and no VAT added) if the listed specific conditions are met.

The Azets VAT team can assist you to differentiate between a recharge and a disbursement and remove the possibility of you making a VAT error. 

If you have any questions in relation to VAT disbursements or your position generally, please get in touch with a member of our VAT team or your usual Azets advisor.