Recharged Expenses – Vatable or Not?

Are you charging VAT correctly for recharged expenses?

One of the areas that businesses can really struggle with is whether to charge VAT on recharged expenses that have been incurred whilst providing services to a client. As a VAT registered business, when you raise an invoice to a client you will add VAT at the rate that applies to the specific type of supply you have made. You should not however, charge VAT when passing on costs that are really those of your client – these are referred to as disbursements.
This can obviously have a large impact if your client is not VAT registered, it can generate a 20% uplift in costs as they are unable to reclaim the VAT element of the recharged expenses. Even if the client is registered, if you charge VAT incorrectly it can cause a problem as they may be blocked from reclaiming it.Balmer Accountancy Recharged Expenses

So what counts as a disbursement?

It is something that you pay but which was actually a supply to your client, with their agreement. A common example is travel costs; these are frequently treated as disbursements but may not be.

Example 1:
Travel and subsistence costs incurred by a consultant in visiting a client. As the client is not the consumer in this case, they cannot be treated as disbursements and VAT must be charged.

Example 2:
You purchase 2 rail tickets so that you and your client can attend a relevant trade fair to source materials for a project you are managing for them. Their ticket was purchased on their behalf, with their agreement, for their travel and so is a disbursement. Your own ticket however, is not a disbursement as it was for your use, not theirs and is treated as in Example 1 above.

Example 3:
A builder buys agreed materials for a job on behalf of the client. As long as certain criteria are met (see below) then these can be classed as disbursements and no VAT should be added.

For further examples visit the HMRC website.

Conditions:
To class as a disbursement, the client must have used or received the benefit of the purchase and:
They were aware it was from another supplier (not you)
They agreed to meet the cost
The disbursements are itemised on your invoice
You only pass on the costs i.e. no mark up
The disbursements are in addition to the supply you are making to them

If you would like any advice about VAT on recharged expenses or any other VAT or tax queries, please contact Mike or Lynn on: 01280 818776 or info@balmeraccountancy.co.uk

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