VAT is an increasingly complex aspect of business life. From deciding which VAT accounting scheme to use, to making MTD VAT submissions, it can all get a bit confusing. Dealing with your VAT records can get particularly tricky if you incur expenses which you then need to pass on to your customers. Welcome to the bewildering topic of expenses versus disbursements.
Disbursements and expenses are very different things, and have different VAT treatments even though you may charge them in the same way. In this article, we’ll look at:
Expenses are things that your business spends money on, such as food, travel, or entertainment. If you have staff there might be times that they incur expenses for work, and your business reimburses them for it.
For example, if you employ a service engineer who visits a customer’s premises to work on their equipment. They may need to reclaim travel costs and if they are away from the office for a long time, food, drinks, or even an overnight stay.
As long as your commercial agreement allows it, you might want to recharge these costs to your customer, or include it in the work quote.
What are disbursements?
Disbursements look almost exactly like expenses from the outside, but the technical reality is a different matter. Similar to expenses, disbursements are a payment you make to a third party that you will likely want to charge to your customer.
The key difference to expenses is that disbursements are something you pay for on behalf of a customer which isn’t as a result of your service.
Examples of disbursements and expenses
Imagine you run a marketing agency. You visit a client’s offices for a planning session, and recharge the train fare; this is an expense.
You also book advertising space for them and set up a new domain name. These aren’t part of your services; you just happen to have the knowledge and contacts to sort these out. You recharge the cost without adding on a markup.
In this case, the latter two recharges are disbursements. In other words, they are something you have paid for on behalf of the customer, rather than something you are charging as a result of your work.
Lawyers may pay for survey fees; architects might pay a building control fee, or a garage might pay an MOT station for an MOT. None of these are the services that they provide, just a fee to be passed on.
Let’s look at another example, such as booking an airline ticket. You book a flight so you can attend a business meeting with a contractor on behalf of the client. In this case, this is an expense, because the airline ticket is bought in order for you to do some work on behalf of your client.
Alternatively, your client is coming to the meeting with you. You book an airline ticket for yourself, and book one for your client while you’re at it. In this scenario:
The ticket for you is an expense (because it allows you to undertake work on behalf of a client)
Your client’s ticket is a disbursement, because it’s not part of your work or service, but you’re sorting it out whilst you book your own.
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Should I charge VAT on disbursements?
If you’re a VAT registered business, then you’ll need to know the difference between expenses and disbursements to make sure you charge VAT to your customers correctly.
So, when you’re passing them on to your clients, should expenses be charged as they are, or should you add VAT? The short answer is that:
Disbursements are simply recharged to the client, and aren’t VATable.
Expenses are a part of the service you supply and as such, you should charge VAT.
So, in summary, you charge VAT on expenses you incur that allow you to carry out work for the customer. You do not charge VAT on things that you are simply paying for on behalf of the customer.
Can I reclaim VAT on disbursements?
The important thing to remember with disbursements is that they’re not part of your service to the customer. Because they’re a cost that you simply pass on to your client, you can’t claim the VAT back on your return.
Basically, the customer reimburses you the cost (including the VAT), so claiming for it on your return as well would mean you received the money back twice!
Instead, your customer will include it on their own VAT return (if they need to submit one), so you may need to provide them with evidence that VAT was originally paid.
Use systems to take the strain
As VAT experts we know better than anyone that the VAT rules and regulations can be a minefield.
One way to make things easier is to set up items and services you use frequently in your bookkeeping system, and include the correct treatment for VAT. For example, you may set up two items to cope with airline flights, one called ‘Air fares (expensed)’ and one called ‘Air fares (disbursement)’.
You can then set the VAT code for each of these to the correct rate. All you have to do is make sure to select the right one!
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About The Author
I'm an experienced and fully AAT and ACCA qualified accountant, who is enthusiastic about helping business owners succeed. I also love cooking and needlepoint (at different times!). Learn more about Beth.