When is an expense not an expense? When it’s a disbursement. But what is that, and why should you care?
The big difference between an expense and a disbursement is how it’s treated for VAT. A disbursement is a payment you make to a third party supplier on your clients behalf. It’s outwith the scope of VAT. This means you neither charge, nor reclaim VAT on it.
The simple reason behind this is that you’re not the customer. It’s your client who buys and receives the goods or services, you are only acting as their agent during the transaction.
To be treated as a disbursement, all the following need to apply:
• 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
Sometimes, during a client relationship you incur costs that you wish to pass on to a client. It’s important to understand the difference between disbursements and recharges. If you visit a client you may want to charge them for your mileage. This is a recharge and would be subject to VAT. The cost of the travel is for you, not the client.
If you pass on disbursements to your client, you’ll need to keep evidence of this. The invoice for the product or service, for example.