VAT on Reimbursement or VAT on disbursement

VAT on Reimbursement or VAT on disbursement

VAT on Reimbursement or VAT on disbursement

Let’s talk about the difference between the VAT on Reimbursement or disbursement. All reimbursements are subject to VAT. While disbursements are outside the scope of VAT.

If a business is trading very close to the VAT registration. The threshold is not the correct classification of expenses. It means that the VAT registration threshold breaches sooner than anticipated.

HMRC defines‘disbursements as payment made to suppliers on behalf of your customers’.
For disbursements, all the following must apply:

  • You paid the supplier on your client’s behalf and acted as the agent of your client
  • Your client received, used, or had the benefit of the goods or services you paid for on their behalf.
  • It’s your client’s responsibility to pay for the goods or services, not yours.
  • You’ve got the permission from your client to pay.
  • Your client knows the goods or services from another supplier that’s not there.
  • You show the costs on your invoice.
  • Pass on the exact amount of each cost to your client when you invoice them.
  • The goods and services you paid for are beside the cost of your own services.

An example of disbursement would be a solicitor paying the stamp duty land tax (SDLT) on behalf of his client. This is a client’s expense, as SDLT is the buyer’s responsibility, not the solicitor’s. This is a disbursement.

 

Example :

 

VAT on reimbursement is the cost of travel, stationery, or other ‘out of pocket expenses’. These are added by consultants on top of the ‘hourly consultancy fee charge’. From HMRC’s point of view, those extra costs VAT on reimbursement. VAT on reimbursement should be added to them as they represent costs. The business incurs itself. It’s simply not disbursement.

The key consideration is whether the expense belongs to the supplier’s customer. Rather than the supplier

 

Court cases

 

Brabners LLP v The Commissioners for Her Majesty’s Revenue & Customs [2017] UKFTT 666 (TC). the First-tier Tribunal considered whether electronic property looks for fees. Which should be treated as part of the client bills (and thus subject to VAT). Represented disbursements (outside the scope of VAT).

Solicitors use the information as ‘part and parcel’. Never treat search fees as disbursements.

Solicitors never act as a middle man to collect the search fee from the client. They use results as part of their advice to clients. HMRC has confirmed VAT is chargeable. Search by company or the solicitor if they passed it on ‘without analysis or comment’

If the firm provides advice or makes a report on the basis of the search. HMRC’s view is that the fee will form part of the charges for its services.

A distinction should create yourself between this case and Barratt, Goff, and Tomlinson. (A firm) v HMRC (Law Society Intervening [2011] UKFTT 71 (TC). A case which refers to in the Brabners judgment above. In Barratt, the obtaining of medical records was a disbursement. The solicitor could only get the documents with the client’s consent. The client considers the ‘owner’ of the information within the document. The solicitor was ‘ an intermediary used to help payment’.

In the case of Ellon Car Clinic Ltd [2017] (TC5813). The First-tier Tribunal considered. A garage that had subcontracted MOT tests to an MOT approved center had acted as agent for the car owners. Whether the output tax was due on the full fee charged by the garage to their clients.

 

Facts of the case

 

The company was not licensed to carry out MOT tests on customers’ vehicles. So, subcontracted these tests to other garages, paying between £40 and £54.95 per test. It charged its customers a standard fee of £49.95 (no VAT), which HMRC assessed as being subject to 20% VAT. The company did not itemize the test fees as a separate entry on its sales invoices.

HMRC assessed output tax on the full fee, on the basis. That the invoices did not meet the conditions of a disbursement.

The judge found that every customer knew that the company could not supply an MOT test. Even if the terms of the invoice did not show the involvement of the second garage. The service contract was clear. The delivery was between the research garage and the company.

This was a partial victory for the company. As it finds the only taxable element of the supply in relation to the MOT tests. Which was the element that exceeded the amount actually paid? No output tax was due on deals where the company made a loss.

Please note that HMRC has now updated their guidance in order for garages to understand. (How to avoid the trap of treating as principals.)

 

Making tax digital (MTD) and disbursements

 

No changes have made to the VAT rules other than those that relate to record-keeping and filing. The information submitted to HMRC contains the same nine boxes as before. The current filing and payment deadlines for VAT are the same as before.

 

Courtesy: ACCA

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