Disbursement or Expense?

What is the VAT treatment on recharged expenses?

There is little logic in VAT legislation, and so the system is set out here for your information. Whether we like it or not, we have to follow the rules!

If you are VAT registered, then you charge VAT to your clients, on top of the cost of your product or services.

If in the course of doing that you incur expenses and you want to recharge those expenses, then you have to charge VAT on top of the expenses as well. The rate is the same rate that you would use for charging VAT on fees (and that can vary). The absurdity of this “VAT on recharged expenses rule” means that (for example) the cost of a train ticket which is normally exempt from VAT, becomes a VATable item the moment you recharge it to a client.

Any expense which you “consume” and then recharge to your client falls into this VAT catchment area. The only time you can avoid charging VAT on an expense is when it falls into the narrow definition of a “disbursement”.

That’s for things that you do not consume as part of your service, but which you pass on intact to your client, or on behalf of your client. In the case a solicitor handling a house purchase, the stamp duty is a disbursement and not an expense. It is not “consumed” as part of the service which the solicitor provided.

Likewise, if I recharge the costs of providing my clients with tea, coffee and milk, then I need to add VAT to the bill (even though food is not liable to VAT). Whereas if I bought a carton of milk for you and handed it over, unused and unopened, then it would be classed as a disbursement.

Crazy, but true. As a general rule add VAT on top of all the expenses that you recharge to your clients!

VAT Payments

VAT is normally due within one calendar month of the VAT quarter.

Even though the quoted date may be 7 days later than the month end, it still makes sense to think of the payment as being due at “the end of the following month”. The reason for this 7 day grace period is that HMRC’s bank does not operate the “faster payments service” and it can take up to 7 days for your payment to reach them!

Please make the payment to the “VAT Controller” in good time, based on our quarterly email. The 300330 report which we prepare also shows this figure at line 5

Your bank may list the VAT controller under HMRC or under VAT. It may also show either the SHIPLEY address or the old SOUTHEND address. If the online banking facility is not clear, then you should specify these details:

• HMRC VAT SHIPLEY
• sort code 08-32-00
• account no. 11963155
• ref – your VAT number

The other way to pay is to set up a direct debit, so that they can simply take the money off you when they like. Debits are normally taken one month and 11 days after the end of the VAT quarter. Be sure to have funds available in your account by the 11th of the relevant month.