In this section:
- What you can and can't reclaim VAT on
- Reclaiming VAT on purchases made before VAT registration
- How to calculate VAT from VAT-inclusive amounts
- Reclaiming VAT on items for both business and private use
- Reclaiming VAT on cars and motoring expenses
- VAT and business entertainment and business gifts
- Travel and subsistence: when you can reclaim VAT
- VAT on incidental expenses to clients; disbursements
- Reclaiming VAT on bad debts on goods or services supplied by you
- Dealing with VAT when goods are returned
- Understanding VAT exemption and partial exemption
- Which transaction should go on which VAT return?
VAT on incidental expenses to clients; disbursements
Some trades and professions such as accountants and solicitors use the term 'disbursements' for various costs related to providing their service, such as travelling expenses. These costs may or may not qualify to be treated as disbursements for VAT purposes. This guide explains which client expenses you can treat as disbursements for VAT purposes.
A payment to a third party by a supplier on behalf of a client is a disbursement for VAT purposes if certain conditions are met, including charging the client the exact amount paid, the client authorised the supplier to make the payment, the supplier acted as an agent of the client and the item was separately itemised when the supplier invoiced the client.
If a payment to a third party is a disbursement for VAT purposes, the
supplier does not need to charge VAT when billing the client for the
item. If an item is not a disbursement for VAT purposes, the supplier
must charge the client VAT when billing.
On this page:
- Disbursements v VAT disbursements
- When a payment is a disbursement for VAT purposes
- When a payment is not a disbursement for VAT purposes
- Keeping records of disbursements
- Advantages to treating a payment as a disbursement
- More useful links
Disbursements v VAT disbursements
Some trades and professions - such as accountants and solicitors - use the term 'disbursements' to refer to all various costs incidental to providing a service, such as travelling expenses. These costs typically are shown or charged separately on client invoices.
These incidental costs may or may not qualify to be treated as disbursements for VAT purposes.
How VAT is treated on disbursements for VAT purposes
If a payment is considered by HM Revenue & Customs (HMRC) as a disbursement for VAT purposes, the item is deemed not to have been provided to the supplier, but directly to the client.
Therefore VAT on disbursements is:
- not charged to the client by the supplier
- not reclaimed from HMRC by the supplier
- only reclaimable by the client if the client obtains a valid VAT invoice
When a payment is a disbursement for VAT purposes
If you are a supplier, payments you make to third parties on behalf of a client can be treated as disbursements for VAT purposes if:
- you acted as the agent of your client when you paid the third party
- you charged your client the precise amounts you paid out, eg without any mark-up for profit
- your client authorised you to make the payment on their behalf
- your client knew that the goods or services would be provided by a third party
- your client actually received and used the goods or services provided by the third party
- your client was responsible for paying the third party eg estate duty or stamp duty
- the item was separately itemised when you invoiced your client
- the goods or services are additional to the services you directly provide to your client
For example, postal charges can be treated as disbursements for VAT purposes if they are provided by a mailing house as they are separate but related to the main service of direct marketing or fulfilment. Postal charges cannot be treated as disbursements for VAT purposes if they were incurred by a solicitor as they are considered by HMRC to be an integral part of that solicitor's service which is reflected in the fee rates.
When a payment is not a disbursement for VAT purposes
The normal costs of doing business cannot be treated as disbursements for VAT purposes.
Costs that cannot be treated as disbursements for VAT purposes include:
- costs incurred or services provided by a business in the course of providing a service to clients, eg account administration
- business expenses, such as travelling and subsistence costs, telephone bills, postage costs and other office costs
- bank transfer fees to or from a professional's own client account
- royalty or licence fees incurred in providing goods or services to a customer or client.
Such costs should either be included in the price of your services on which you charge VAT, or invoiced or charged separately and VAT charged on those items
Keeping records of disbursements
As a supplier, you must keep records such as order forms and copy invoices, which show that you:
- were entitled to exclude the payment from the value of your own services to your client
- did not reclaim VAT on the goods or services provided by the third party.
Advantages to treating a payment as a disbursement
Treating a payment as a disbursement for VAT purposes means you do not need to add VAT when you bill your client. This helps save money for clients who are not registered for VAT or otherwise not entitled to reclaim VAT on these costs either directly from you or from the third party.
More useful links
Find out about VAT registration
Read about the difference between standard, reduced, zero and exempt VAT rates
