Posted: October 10, 2017
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 of 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, as in the following situations;
1) Where a law firm handled a property conveyance that involved some kind of land search or registration, the final invoice might show a description of the work relating to the professional advice and input in the conveyancing with a related value, and then a line or two itemising the search or registration fees that the law firm paid on behalf of the client. The professional fee value attracted VAT at the standard-rate, whereas the recharged (or ‘disbursed’) costs did not. All that was really happening was that the law firm was asking the client to pay back the amount that was spent out for the client on a supply made to the client – almost like lending someone some money to pay a bill. The recharge was at the same value as the underlying charge – no profit or uplift.
2) The same law firm might need to attend a court hearing in London for the client. A lawyer would take the train up to London, get a taxi to the court, and spend a day on the case before returning. The invoice for this would show the day rate plus travel expenses (which could be exactly the same as the train and taxi fare, or at an agreed rate), and the whole cost would attract VAT at the standard-rate. Even the fact that the train fare would be at the zero-rate would not prevent VAT being applied to the total cost.
One of the key differences here is that in (1) the law firm has not received the supply of the search, registration etc. which has been made to the client – they’re just paying for it and asking to be reimbursed. In (2) the lawyer has ‘consumed’ the costs of travel in the course of making the overall supply of a day in court, 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?
If the answer to any of the above is ‘no’ then VAT might apply to the onward supply, rather than it being a disbursement for VAT. If you have any concerns or queries on this please don’t hesitate to get in touch with us.