Do you apply VAT on disbursements?
Disbursements – simplified
If you are providing services to your client you will, occasionally, need to pay for items on their behalf.
So, do you charge any VAT on this (assuming you are VAT registered)?
The answer depends on if you “use” the thing you paid for or benefit from it in any way. If the answer is no to both these questions – and you are acting merely as a middleman (with no commission) then you do not need to charge VAT.
1. No VAT if the item is only paid for on behalf of the customer (with no mark-up and no use by the provider. Full permission given by the end client must also be given).
Examples of this are as follows:
– A website company may charge its client £1000 + VAT for a website. However, the purchase of the domain at £15 did not include VAT. The website company does not “use” the domain and this domain is on behalf of the end user (client only). The client is aware of this and asks the website company to just “add it to the bill”.
– A solicitor may pay search fees and stamp duty on behalf of its client. Clearly, the solicitor is not buying the house for himself. He merely pays the search fees and stamp duty due to convenience. The client reimburses the solicitor without paying VAT. However, he will pay VAT on the solicitor’s normal services.
– A builder may have bought a bathtub from the local (small) bathroom store for £500 and not paid VAT on this. He charges £500 + VAT for his labour but only £500 for the bathtub. The bathtub is for the use of his customer only and the builder has only paid for it on his behalf.
2. Where VAT must be charged!
2a) Profiteering/marking up
– (Using the earlier example) If the service provider profits in any way from the re-selling then VAT must be applied. For example, if the website company decides to sell the domain on at £50, he must add VAT to it as he is not commercially neutral any more. Note here that he charges VAT on the whole £50 and cannot reclaim any VAT (as he hasn’t paid any).
2b) If the provider “uses” the item to be recharged.
– An example here is if the website provider wants to be reimbursed for travel to his client’s site – he must add VAT to this. It is no longer called a disbursement but a “recharge”.
– One of the main examples of this is in commercial property. The owner of the building does not pay VAT on the insurance of the building (insurance is VAT exempt ordinarily). However, when he recharges this insurance to tenants (even at no profit) he must then apply VAT to the (previously exempt) insurance as he is ultimately benefitting from the insurance of the building.
If an accountant sends letters to his clients he may not pay VAT on the envelopes but he must add it on if he wishes to recharge the cost separately. In practice this is often consumed within the regular bill! The main point here is that the accountant has made use of the letter and is more than just a middle man here.
Feel free to call us for clarification on these matters.