Q. My client is an IT consultant, operating through a VAT registered UK company. He is supplying consultancy services to another UK IT business. He has incurred hotel, travel and meal expenses, and is charging these on to the company he is supplying. Can he treat these as disbursements, and therefore not charge any VAT on them?
A. The treatment of recharged expenses is a common cause of VAT errors. A disbursement is where you act on behalf of your customer in arranging and paying for goods or services, but the underlying supply remains between the supplier and your customer.
A common example of a disbursement is the Companies House filing fee. Here the supply is between Companies House and the company, but it is common practice for an accountant to file and pay the fee on their client’s behalf. Because the ‘supply’ remains between Companies House and the client, the accountant can treat this payment as a disbursement, as long as the disbursed amount is clearly shown on an invoice separately from any other supply, and the exact cost is passed on. The accountant, therefore, does not need to account for VAT when they recharge this cost on to the client.
However, in your client’s case the supplies of hotel accommodation, travel and meals are being supplied to and are consumed by them, not their customer. Therefore, this is not a disbursement, and your client must treat any recharge of these types of expense as further consideration for the main supply.
This is important, as supplies such as rail travel, which is zero-rated when your client purchases them, will have to be recharged at the same liability as the main supply. In your client’s case, their consultancy services are standard-rated, and therefore any recharge of their own expenses will follow this liability and also be standard rated.
Guidance on how to show recharges and disbursements on your invoices can be found on the GOV.UK website VAT: costs or disbursements passed to customers
