This is an area we get asked about frequently.
Many businesses make the mistake of thinking that expense recharges are disbursements and therefore they don’t include VAT on the sales invoice. As soon as we see this on sales invoices alarm bells start ringing and we know we have to break the news.
When a consultant or any other kind of business recharges the costs it has itself incurred in the course of providing its services to its customers, that recharge is not a disbursement.
As per HMRC guidance on disbursements in section 25 of Notice 700: The VAT Guide, a disbursement is the result of acting as a disclosed agent between your customer and a third party to facilitate a supply of goods or services between those parties, and the supply made must be used by your customer – not by you!
There are eight conditions which need to be met for a payment made to a third party on behalf of your client to be treated as a disbursement:-
Recharges of a business’s own travel, subsistence or other costs are not disbursements – the customer is not using the transport, eating the meal or doing the miles in the case of a mileage rate. The recharge is correctly treated as further consideration for the goods or services supplied.
Therefore you need to treat the sales invoice as your daily rate plus costs and VAT will apply.
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