When you buy things for your client on their behalf the items could be excluded from your VAT calculations if they are Disbursements
To treat a payment as a disbursement all of the following must 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
It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can’t reclaim the VAT.
An example of an invoice showing disbursements and recharges
A website design consultant based in London does a week’s work for a client in Edinburgh. The consultant visits the client’s premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.
The consultant and the client agree the following fees:
| Activity | Fee |
|---|---|
| Consultant’s work | £2,500 plus VAT |
| Consultant’s travelling expenses | £300 |
| Website hosting package purchased on the client’s behalf | £150 |
The £300 travel cost that the consultant recharges to the client is not a disbursement so the consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:
- it was purchased for the use of the client
- the client agreed that the consultant would arrange and pay for it on their behalf – this means the consultant agreed to act as the client’s agent
- the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
- it was the client’s responsibility to pay for the goods
- the consultant had permission from his client to make the payment
- the client knew the web hosting package was from another supplier and not from the consultant
- the consultant showed the costs separately in the invoice
- the web hosting package paid for by the consultant is additional to the other services being billed to the client
The consultant’s invoice to their client for this work might include the following items:
- design services – £2,500
- travelling expenses – £300
- amount on which VAT is due – £2,800
- VAT at 20% – £560
- disbursements – £150
- total including VAT – £3510
