You have incurred costs which your client will reimburse you for. You cannot ignore this for VAT, unless it qualifies as a disbursement.
What is not a disbursement?
Expenses such as travelling, accommodation and postage are not disbursements, they are incidental to your business – the expense was for you, and not for your client – you stayed in the hotel and you travelled on the train. When recharging expenses such as travelling, accommodation and postage, then you must charge VAT.
If you show these expenses separately on your invoice to your client they’re known as ‘recharges’, and not disbursements. You must charge VAT on recharges, whether you paid any VAT or not.
Some examples (copied from HMRC) of costs that could be recharges but are not disbursements include:
- an airline ticket that you buy to visit a client or to travel to a job, if you recharge the cost to your client you must charge VAT because the flight was for you, not for the client
- postage costs you incur when you send letters to your customers, these are normal business costs and you must add VAT if you recharge them
- a bank transfer fee paid when transferring money from your business account to a client’s account – even though the bank’s fee is exempt from VAT, if you recharge the fee you must charge VAT, because it was for a service provided to your business and not to your customer
The VAT treatment of a recharge follows that of the service it relates to. So, if you’re providing standard rated consultancy services, then VAT must be charged on top of the expense (e.g. travel costs) recharged. You can get around this by asking your client to purchase the travel or other expense directly for you, instead of you purchasing it and invoicing them for it. And then your client would be able to claim VAT on the original purchase made by them directly.
What is a disbursement?
A disbursement is a payment that your business makes on behalf of your client. Such payments are outside the scope of VAT, meaning that you cannot claim VAT and will also not charge VAT when you invoice your client. This is because it is your client and not your business that buys and receives the goods or services – you are simply acting as their agent. All of the following must apply for an expense to qualify as a disbursement for VAT:
- you acted as agent for your client and paid a third party on behalf of your client;
- your client received, used or had the benefit of the goods or services;
- your client was responsible for paying the third party;
- you had permission from your client to make the payment;
- your client knew that the goods or services would be provided by a third party;
- you show the amount separately on your sales invoice to your client;
- you only recharge your client the exact amount that was paid to the third party, VAT inclusive;
- the goods and services you paid for are additional to the cost of your own services.
Please refer to this HMRC link for more info.
This blog is for information purposes only, and is not intended to provide tax advice – for this, you should consult an accountant.