VAT disbursement - the rules

21 July 2009

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If you pay suppliers on behalf of your customers, and you pass on the cost to your customers when you invoice them, then you might be able to leave out these payments from your VAT calculation. In this situation it is the customer, not you, who buys and receives the goods or services - you're acting as their agent. This type of payment is known as a 'disbursement' for VAT purposes.

Of course, this is only an issue if the charge involved is initially VAT free since, if it were VATable, there would be no benefit to the final customer in passing the charge on "in the same state". The points below assume that the charge in question is VAT free, e.g. statutory fees (land registry, stamp duty, search fees, MOTs, etc.) insurance and financial products, although benefits may also be obtained if the original supply is reduced rated.

So, what are the rules?

A disbursement is passed on without any alteration (e.g. not marked up or changed in any way) and the supply must be to the final customer by the original provider. If the supply is VAT free then the recovery of the costs is also VAT free. The passing on of the payment from the final customer to the supplier is done as an agent. Therefore, in these circumstances, a supplier is acting as principal for part of a supply, and agent for another part.

A distinction must be drawn between a necessary cost component of a supplier making a supply and a disbursement. An example is zero-rated travel. A supplier may incur a train fare in providing his service, but that is a cost component for him and not a disbursement, so VAT would be added to any onward charge. It is clear that the supplier is not actually supplying train travel to his customer, but is consuming the cost in providing his VATable service.

The following criteria must be met by a supplier to establish whether it qualifies as a disbursement:

you acted as the agent of your client when you paid the third party
your client actually received and used the goods or services provided by the third party
your client was responsible for paying the third party
your client authorised you to make the payment on their behalf
your client knew that the goods or services you paid for would be provided by a third party
your outlay will be separately itemised when you invoice your client
you recover only the exact amount which you paid to the third party
the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.

About the author

This article was written by Marcus Ward, VAT Director at Price Bailey in Bishop Stortford. Marcus is also a member of the UK200Group tax panel. Established in 1986, UK200Group is the leading mutual professional association in the UK with over 110 UK quality assured independent accountancy firms and lawyer firms, as well as 50 International Associate member firms around the globe. UK200Group provide services and products that are designed to enhance the business performance of its members. Telephone 01252 401050 Email admin@uk200group.co.uk or visit www.uk200group.co.uk .

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VAT disbursement - the rules

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