Posted: December 13, 2017
The earlier article on the VAT treatment of disbursements has had to be updated as a result of a VAT tribunal case. The example provided in that article that illustrated a non-VATable disbursement scenario has now been judged to be one that should attract VAT, and so should not be used as any kind of template or treatment to be followed.
It remains the case that a supply that is paid for by a business on behalf of a client may still be treated as a disbursement for VAT purposes, however the implications of this recent case would seem to suggest that there has to be clearly defined treatment and arrangement for that re-supply in order for it not to be considered as a VATable component of the underlying supply. The article has been amended and is shown below.
It’s always nice when you get something paid for by someone else, but in the ruthless world of commerce it’s likely that any such action is going to end up on an invoice as a recharge at some point. Often the cost will be rolled up within an overall charge for goods or services, but occasionally it will be separately itemised as an added extra.
The question then arises as to how to treat this for VAT purposes.The use of the word ‘disbursement’ in VAT terms has its own interpretation and definition, and has been recently tested in the courts in respect of legal fees that are recharged. In explaining how disbursements worked it was often the legal sector that provided good examples, but the following example uses another similar situation;
1) A communications consultant visits a client to advise on their corporate communications systems. They provide a report on this, and as an additional element of their visit they arrange for a specific communication system licence to be provided to the client. The contract for this system licence is clearly between the communication provider and the client and has been arranged on their behalf by the consultant. In this instance the report and advice element would attract VAT, the recharge for the licence provided to the client would not (on the basis that there was no ‘consumption’ of the licence in any way by the consultant).
2) The same consultant might need to visit the Scottish office of the client. This might involve a combination of taxis, rail and airfares for the travel plus an hotel for the night spent in Scotland before returning. The invoice for this would show the day rate plus travel and accommodation expenses (which could be exactly the same as the amounts paid out, or at an agreed rate), and the whole cost would attract VAT at the standard-rate. Even the fact that the train and air fares would be at the zero-rate would not prevent VAT being applied to the total cost.
One of the key differences here is that (1) the consultant has not received the supply of the licence which has been provided to the client – they’re just paying for it and asking to be reimbursed. In (2) the consultant has ‘consumed’ the costs of travel and accommodation in the course of making the overall supply of a day in Scotland, and so the entire amount is treated as one supply.Whilst the recent VAT case has specific implications for law firms with land and property search fees, it is probably time well spent for any business that recharges clients and customers for any ‘added extras’ to make sure that they are treating these correctly for VAT purposes.
A quick ‘ready reckoner’ for this would be:
1) has your client asked you to buy in this item on their behalf?
2) have they been supplied with the item directly?
3) have you recharged them the exact same amount for this item?
4) have you shown the recharge separately on your invoice?
5) has the supplier of the item been made aware that it is for the client?
So the point to emphasise here is that if you are in any way using, interpreting, consuming or reviewing any onward supply of goods or services then this is likely to be considered as part of your overall supply, and VAT added accordingly. If you have any concerns or queries on this please don’t hesitate to get in touch with us.