Recharges – is it a disbursement or an expense for VAT purposes?
In this article we look at VAT and delve into our recent client and HMRC interactions to provide some guidance on client recharges and the circumstances in which they constitute a disbursement or an expense.
What qualifies as a disbursement?
For an item to qualify as a disbursement, all of the following conditions must be met:
- you paid the supplier on your customer’s behalf and acted as the agent of your customer,
- your customer received, used, or had the benefit of the goods or services you paid for on their behalf,
- it was your customer’s responsibility to pay for the goods or services, not yours,
- you had permission from your customer to make the payment,
- your customer knew that the goods or services were from another supplier, not from you,
- you show the costs separately on your invoice,
- you pass on the exact amount of each cost to your customer when you invoice them, and
- the goods and services you paid for are in addition to the cost of your own services.
Expenses and the correct rate of VAT
If this cost incurred does not meet all of the above conditions to qualify as a disbursement, then it should be treated as an expense and within the scope of VAT. In most cases, expenses will need to be treated as part of a single supply for VAT purposes rather than multiple separate supplies. This is largely because of the cases of ‘Card Protection Plan’ and ‘Levob’ which between them determined that an expense should be treated as part of the main supply where, it is ancillary to the principal element of supply or where two or more elements are so closely linked that ‘splitting’ them would be artificial.
Summary
As always, our team are on hand for more information.
With HMRC having a four-year window to raise an assessment (not including fraud cases) it is vital that clients understand the distinction between a disbursement and an expense, and the circumstances in which expenses should be treated as part of a single supply for VAT purposes.
