When you bill a client you add VAT at the rate that applies to the type of supply you’ve made. However you could be charging too much VAT. When you are merely passing on costs that are those of your customer you shouldn’t charge VAT. This is referred to as a disbursement. This often causes problems for businesses (and accountants!) in deciding what does and doesn’t count as a disbursement.
Why does it matter?
If a customer isn’t registered or is partly exempt, they are blocked from recovering all or some of the VAT charged. Meaning they wouldn’t be happy if you charged VAT when you shouldn’t.
It can also cause problems even if a customer is VAT registered as it can block them from reclaiming it. For example if your business was buying something VAT exempt for £1,000 but was charged VAT at 20%. You pay £1,200 which wouldn’t be a problem as you could reclaim this on your next return. However if HMRC were to pick up on this error they would make you repay the £200.
What counts as a disbursement?
A disbursement is something that you pay but was actually a supply to your customer.
An example of this would be if you was traveling with a customer. At the train station you pay for both fares to make things easier, with the understating you’ll pass the costs on in your bill. His fare would be a disbursement but yours wouldn’t.
It’s often mistaken that travel and subsistence costs taken to visit a customer are a disbursement but in this case the client isn’t the consumer so the expense is not a disbursement.
Another case were a disbursement can be applied is a builder buying the materials for a job on behalf of the customer.
However there are conditions that must be met:
The customer must know that you were paying for something from another supplier and not you
They must have agreed to meet the cost
You must itemise the disbursements on your invoice
You pass on the cost and no more
The disbursements are additional to the supply you’re making to them.