VAT: costs or disbursements passed to customers
Fleur Lewis is a partner at Bishop Fleming Accountants
Anyone running their own VAT-registered business may on occasion pass on costs to their customers that they have incurred on their behalf writes Fleur Lewis.
Such costs can be treated as ‘disbursements’ for VAT purposes, which means you won’t have to charge VAT on them when you invoice your customer, and you also can’t claim back any VAT on them.
You may also be able to leave these costs out of your VAT calculations because it’s the customer, not you, who has bought the goods or services; you were merely acting as their agent in acquiring them.
It is 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.
HM Revenue & Customs has set out eight rules that must all be met in order to treat a payment as a disbursement for VAT purposes:
· you paid the supplier on your customer’s behalf and acted as the agent of your customer
· your customer received, used or had the benefit of the goods or services you paid for on their behalf
· it was your customer’s responsibility to pay for the goods or services, not yours
· you had permission from your customer to make the payment
· your customer knew that the goods or services were from another supplier, not from you
· you show the costs separately on your invoice
· you pass on the exact amount of each cost to your customer when you invoice them
· the goods and services you paid for are in addition to the cost of your own services
Further guidance on this can be found here:
So why is this relevant at the moment?
Well, a recent court case has brought this area to light, and businesses that charge disbursements should take note.
The case concerned the treatment of search fees paid by solicitors, and found that VAT should be charged when the cost is passed on to the client.
The solicitors argued that the cost of searches were incurred on behalf of their clients, and that these had met the 8 tests mentioned above for their treatment as disbursements, and therefore they did not need to charge VAT when they passed the cost on to clients.
However, the tax office argued that one test had not been met: that the solicitor’s client needed to have received and used the search results in order for this treatment to apply. But in this case the solicitors themselves had used the search information to provide their advice on the property purchase, rather than merely passing it on to the client and allowing them to draw their own conclusions.
As a result, the court decided that VAT needed to be charged by the solicitors on their recharge of the online search fees.
Although the case is not binding on other businesses, it may lead to future clarification of the tax office’s treatment of charges of this kind. Anyone who has doubts with this area should consult their VAT adviser to ensure they are adhering to the correct treatment of disbursements.
Fleur Lewis is a partner at Bishop Fleming Accountants http://bishopfleming.co.uk/person/fleur-lewis/