Disbursements – Buying goods on behalf of your clients
If you are spending money on behalf of your clients- be aware.
Disbursements are not included in the VAT turnover calculation, so you must ensure they meet the conditions.
To be more specific, let’s look at the case of Mr Bilsby. He was a heating engineer and plumber and he was very careful in calculating his turnover in order to not exceed the VAT registration threshold.
Unfortunately he made one misjudgement. He thought that if he bought parts from the wholesaler and then included them with labour costs on his customers invoice without marking them up it would count as being a disbursement. HMRC argued that as he did not itemise the expenses on his invoice, they should be included in calculating his VATable turnover and that there was VAT and penalties to pay.
How to avoid this
We suggest that people in a similar situation review whether they are acting as an agent or principal.
If you are acting as an agent and you fulfilled the eight conditions that VAT guide sets then you can recognise the costs as a disbursement.
This rule only applies if:
- You act as an agent
- The use of that item it does not benefit you
- There is no mark-up to the expense incurred
In addition, there should be an agreement with the client that you will be paying for the expenses on their behalf. Do not forget to itemise the items on the invoice.
Key points to remember:
- Act as an agent
- Itemise the items on the invoice
- Don’t mark-up the expenses
- The person paying the expenses should not benefit from the use of them
For more examples and further information please visit our blog: Do you apply VAT on disbursements?