Many businesses do not understand the difference between expenses and disbursements when they recharge costs to their clients. In addition, they may also then be adding on VAT – but is this correct?
Firstly, lets discuss “Expenses”. Expenses are items that you incurred a charge for on behalf of doing some work for a client, which you then may reargue the client for. Examples are things such as travel expenses, mileage claims, software licenses etc. Your aim in recharging the client is to simply put back in your pocket, anything that you are out of pocket by as a result of working for them. These are all subject to VAT rules.
Now lets discuss “Disbursements”. This is a term many are unfamiliar with. This is for those types of expenses where you are not the intended consumer however you are just making the payment on behalf of your client as it makes the workflow easier. For example, a solicitor paying a filing fee for you, or perhaps us paying for a automation plugin for you on your behalf. As the consumer, all the cost is done in the end-clients name, but it just so happens that you in the middle have facilitated the payment using your own funds. Assuming you pass on the cost of these items ‘at cost‘, then these are not subject to VAT.
There are some definition rules to be aware of to treat a cost as a disbursement;
Finally, what happens if you want to make a small margin for yourself on your Disbursements? Lets use the solicitor example above and assume that they want to recover the cost of a filing fee and add on £50 for their time. If they group this as a single line on their invoice, the entire amount becomes subject to VAT as they are adding-value to the filing service by doing it for you. If they itemise their invoice, then the VAT treatment can also be split.
For the end-consumer (which could be YOU) this is important to be aware of because if you are not VAT registered yourself, this is addition cost to you that could be avoided.
A last note for those still on the VAT flat-rate scheme – the advise for you is a little different. Get in contact for more detailed advise on this.
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