Should VAT be charged on disbursements?
When preparing your bills you will have a variety of costs relating to the services you provide including disbursements incurred.
You need to carefully assess whether the disbursement is VATable or not under HMRC regulations.
It is important to ensure that input VAT is not reclaimed on disbursements which are specifically payable by the firm on behalf of your client, as these costs are not recharged to the client with output VAT added.
A payment qualifies as a disbursement for VAT purposes if the following criteria are met:
– The payment has been made to a third party, on behalf of your client, whilst you were acting as agent.
– Your client is charged the exact amount paid to the third party.
– The client authorised the payment.
– You show the amount separately on your bill.
– The goods/ services provided were properly required on behalf of your client.
Common examples of disbursements which qualify are stamp duty; estate agents fees; office copies; land registry charges; medical fees; medical reports; hire charges; vehicle repairs.
If the costs incurred on behalf of your client qualify as disbursements for VAT purposes then no VAT should be charged to the client on your bill. Similarly no VAT should be reclaimed unless the client you are acting for is VAT registered and they retain a valid VAT invoice.
Any costs charged to your clients that are incurred as part of your normal service to them cannot be treated as a qualifying disbursement for VAT purposes. Therefore you should charge VAT on such costs when preparing your bills.
Common examples of costs which do not qualify are bank transfer fees to or from your office account on behalf of your client (even if you only charge the equivalent of the transfer fee charged by your bank); business expenses such as telephone, postage, travelling, subsistence or other office costs.
Items such as these are recharged to clients with output VAT added and should be billed as part of the firms profit costs before all other disbursements are listed out.
If you would like more information on the topic, please contact us on 01772 821 021.