Charging VAT on Expenses – Disbursements and Recharges

For VAT purposes, Disbursements and Recharges are two ways of treating costs incurred on behalf of customers.

DISBURSEMENTS

Goods or services paid for on behalf of a customer but RECEIVED AND USED BY THE CUSTOMER can be treated as disbursements for VAT purposes. This essentially means that your role is limited to that of an ‘agent’.

In the above case:
– You don’t charge VAT when you invoice that customer.
– You can’t claim back any VAT on the goods/services.

To treat a transaction as a disbursement, all the following MUST apply:
– 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
– The goods and services you paid for are in addition to the cost of your own services

Examples of disbursements are:
– a website domain cost incurred on behalf of a client
– a website hosting package incurred on behalf of a client

As any VAT incurred on disbursements cannot be reclaimed, it is normally only advantageous to treat a transaction as a disbursement if:
– The supplier is not vat-registered OR
– The transaction is vat-exempt or not vat-chargeable OR
– Your customer can’t reclaim VAT.

RECHARGES plus WHEN DISBURSEMENT DOES NOT OR SHOULD NOT APPLY

Costs you incur when supplying goods or services to a customer is not a disbursement whether or not you decide to itemise them on your invoice.

If these costs are separately shown when you invoice your customer, they are known as ‘recharges’. Recharges are identifiable costs you re-invoice to a customer for services or goods USED BY YOU.

Examples of recharges are:
– an airline ticket you pay for to travel to a job
– postage costs you incur when when you send items to a customer
– bank transfer fee you incur when funds are transferred to a customer’s account.

Recharges MUST be VAT-invoiced whether or not you are charged VAT.

To summarise, there are two ways of treating costs incurred on behalf of customers. Both have VAT implications so choose wisely.