Lots of people get confused about the VAT treatment of expenses which are recharged to customers. The rule to remember is; all recharged expenses carry VAT, unless the item is a disbursement.
You must not charge VAT on the value of the disbursement and neither can you reclaim any VAT which forms part of the cost of the disbursement.
An expense is a disbursement if it belongs to the customer and business has paid the expense on behalf of its customer. For example, a solicitor may pay the land registry fees on behalf of his client, but those fees “belong to” the client who bought the property. It is the client who is ultimately responsible for paying the land registry fee in respect of his property.
Conversely the solicitor may incur a courier fee to send documents to his client for signature. The courier fee belongs to the solicitor, as he engaged the courier, so where the cost is recharged to the solicitor’s client the courier fee must carry VAT.
It is important that recharged expenses and disbursements are clearly distinguished on the VAT invoice. Ellon Car Clinic got into trouble with HMRC, as it recharged MOT fees to its customers but did not separately show those fees as disbursements, although it correctly excluded the MOT fees from the amount charged to VAT. The Ellon Car Clinic won its case at the First-tier tribunal, but it would have saved a lot of trouble if its VAT invoices had been clearly set out.
For more information about Tax planning Cardiff contact DFC Accountants in Cardiff