Knowing the difference is important in getting the right VAT treatment
The difference between reimbursement and disbursement is significant from the VAT point of view as reimbursements are subject to VAT, while disbursements are outside the scope of VAT.
If a business is trading very close to the VAT registration threshold, an incorrect classification of expenses could mean that the VAT registration threshold is breached sooner than anticipated.
Disbursements may be defined as ‘a payment made to suppliers on behalf of your customers’.
KEY CONSIDERATIONS
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you paid the supplier on your client’s behalf and acted as the agent of your client.
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your client received, used or had the benefit of the goods or services you paid for on their behalf
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it was your client’s responsibility to pay for the goods or services, not yours
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you had permission from your client to make the payment
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your client knew that the goods or services were from another supplier, not from you
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you show the costs separately on your invoice
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you pass on the exact amount of each cost to your client when you invoice them
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the goods and services you paid for are in addition to the cost of your own services.’
Illustration
- An example of disbursement would be a solicitor paying the stamp duty land tax (SDLT) on behalf of his client. This is clearly a client’s expense, as SDLT is the buyer’s responsibility not the solicitor’s. This is undoubtedly a disbursement.
An example of reimbursement would be the cost of travel, stationery or other ‘out of pocket expenses’ added by a consultant on top of his ‘hourly consultancy fee charge’. From HMRC’s point of view, those extra costs are reimbursements and as a result VAT should be added to them as they represent costs that the business incurs itself and are not disbursements.
The key consideration is whether the expense belongs to the supplier’s customer, rather than the supplier.
Court cases
In Brabners LLP v The Commissioners for Her Majesty’s Revenue & Customs, [2017] UKFTT 666 (TC), the First-tier Tribunal considered whether electronic property search fees should be treated as part of overall client bills (and thus subject to VAT), or represented disbursements (outside the scope of VAT).
It was found that because the solicitors were using the information as ‘part and parcel’ of its overall service, the search fees should not be treated as disbursements.
The solicitors were not simply acting as a middle man to collect the search fee from the client; they used the results as part of their advice to clients. HMRC has confirmed that VAT would not be chargeable by either the search company or the solicitor if they passed it on “without analysis or comment”. However, if the firm provides advice or makes a report on the basis of the search, HMRC’s view is that the fee will form part of the charges for its services.
However, a distinction should be drawn between this case and Barratt, Goff and Tomlinson (A firm) v HMRC (Law Society Intervening [2011] UKFTT 71 (TC), a case which was referred to in the Brabners judgement above. In Barratt, the obtaining of medical records was a disbursement because the solicitor could only obtain the documents with the client’s consent, and the client was considered as the ‘owner’ of the information within the document. The solicitor was ‘merely an intermediary used to facilitate payment'.
In the case of Ellon Car Clinic Ltd [2017] (TC5813) the First-tier Tribunal considered whether a garage which had subcontracted MOT tests to an MOT approved centre had acted as
