VAT on recharges and disbursements can be a real challenge for motorsport businesses. Check out the Harris & Co motorsport accountants guidance on the subject:

VAT AND DISBURSEMENTS

Thanks for your call yesterday. I have set out the position on VAT and disbursements below.

1. EXAMPLE

Let’s say that you are a VAT registered motorsport consulting business and you take on a new client who needs help with their motorsport. You agreed that you will charge them a day rate, but their offices are no-where near you and so you are going to have to travel to get to them. The client therefore also agrees to cover any of your travel and subsistence costs incurred during your time working with them.

On the job for this client, you advise them that a current problem they are having could be resolved if they invested in some sophisticated engine management software.

The client agrees with your advice and tells you to go ahead with purchasing the new software on their behalf.

Two weeks later, you’ve installed the software, resolved the issues and your client is very satisfied.

So you now need to prepare and send them your invoice.

So, do you include the travel and subsistence costs and the software you purchased on their behalf in the VAT calculation on the invoice? Or do you exclude them?

Well, you actually have two different types of payments here and it is important you know the difference because they should be dealt with differently on your invoice and in your VAT calculation.

2. DISBURSEMENT

The first type of payment is known as a ‘disbursement’.

A disbursement is if you pay suppliers on behalf of your customers, and you pass on the cost to your customers when you invoice them. In this situation it is the customer, not you, who buys and receives the goods or services and you are merely acting as there agent.

Before you treat a payment as a disbursement for VAT purposes, you’ll need to make sure all the following apply:

1. you paid the supplier on your customer’s behalf and acted as the agent of your customer
2. your customer received, used or had the benefit of the goods or services you paid for on their behalf
3. it was your customer’s responsibility to pay for the goods or services, not yours
4. you had permission from your customer to make the payment
5. your customer knew that the goods or services were from another supplier, not from you
6. you show the costs separately on your invoice
7. you pass on the exact amount of each cost to your customer when you invoice them
8. the goods and services you paid for are additional to whatever you’re billing your customer for doing yourself

If you have a disbursement, you charge the customer the same cost that you paid on their behalf. Usually disbursements are shown at the bottom of your invoice and added to the total after VAT has been charged to the services supplied.

The invoice would look like this:

Note that you cannot reclaim VAT on any disbursements – it will be up to the end client to reclaim any relevant VAT contained within the disbursement.

If you pass on any disbursements to your customers and therefore do not charge VAT on them, you must keep evidence to show that you were entitled to leave the items out of the VAT calculation when you invoiced your customers. Examples of the types of evidence that would show this include order forms and invoice copies.

You must also be able to show that you haven’t claimed back the VAT on items you paid for on your customers’ behalf.

3. RECHARGE

However, there are many incidental costs that your business might incur that you cannot exclude from the VAT calculation as a disbursement when you invoice your customers. These could include travelling expenses and your own postage costs. They are not treated as disbursements for VAT purposes.

Any costs that your business incurs itself in the course of supplying goods or services to customers are not disbursements for VAT purposes. It is you, and not your customer, who purchases the goods or services, which are supplied to and used by your business.

It is up to you whether or not you itemise costs like these on your invoices. If you do show them separately when you invoice your customers then they’re known as ‘recharges’, and not disbursements, for VAT. You’ll have to charge VAT on them whether you paid any VAT or not.

Some examples of costs that could be recharges but are not disbursements include:

An airline ticket that you buy to visit a client or to travel to a job. If you recharge the cost to your client you must charge VAT because the flight was for you, not for the client.

Postage costs you incur when you send letters to your customers. These are normal business costs and you must add VAT if you recharge them.

A bank transfer fee you might incur when transferring money from your business account to a client’s own account. Even though the bank’s fee is exempt from VAT, if you recharge the fee you must charge VAT. This is because it was for a service provided to your business and not to your customer

And, to claim back the VAT on costs and expenses you pass on to your customers as recharges, you’ll need a valid VAT invoice or receipt for each.