How to account for VAT if you make supplies to your customers, and you pay certain costs that you pass on when you invoice them.
Overview
When you make payments on behalf of your customers, for goods or services received and used by them, you might be able to treat these payments as ‘disbursements’ for VAT purposes. This means that you:
- don’t charge VAT on them when you invoice your customer
- can’t claim back any VAT on them.
This guide explains when you should charge VAT on the costs and expenses you pass to your customers
payments like these can be treated as disbursements
Disbursements: costs to exclude from VAT calculations
A payment made to suppliers on behalf of your customers is called a ‘disbursement’ if you pass the cost on to your customers when you invoice them.
You might be able to leave out these payments from your VAT calculations because it’s the customer, not you, who buys and receives the goods or services; you’re just acting as their agent.
To treat a payment as a disbursement all of the following must apply:
1. you paid the supplier on your customer’s behalf and acted as the agent of your customer
2. your customer received, used or had the benefit of the goods or services you paid for on their behalf
3. it was your customer’s responsibility to pay for the goods or services, not yours
4. you had permission from your customer to make the payment
5. your customer knew that the goods or services were from another supplier, not from you
6. you show the costs separately on your invoice
7. you pass on the exact amount of each cost to your customer when you invoice them
8. the goods and services you paid for are in addition to the cost of your own services
It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.
What isn’t a disbursement
There are many incidental costs your business might incur that must be included in VAT calculations when you invoice customers. These include items like travelling expenses and your own postage and delivery costs.
Costs that your business incurs itself when supplying goods or services to customers are not disbursements for VAT. It’s you who buys the goods or services for use in your own business.
It’s up to you whether or not you itemise costs like these on your invoices. If you do show them separately when you invoice your customers they’re known as ‘recharges’, and not disbursements. You’ll have to charge VAT on them whether you paid any VAT or not.
Some examples of costs that could be recharges but are not disbursements include:
an airline ticket that you buy to visit a client or to travel to a job, if you recharge the cost to your client you must charge VAT because the flight was for you, not for the client
postage costs you incur when you send letters to your customers, these are normal business costs and you must add VAT if you recharge them
a bank transfer fee paid when transferring money from
- (chars - 2890)
our business account to a client’s account - even though the bank’s fee is exempt from VAT, if you recharge the fee you must charge VAT, because it was for a service provided to your business and not to your customer
Showing disbursements and recharges on your invoices
If you exclude disbursements from the VAT calculations you must itemise them separately on your VAT invoices.
