Expenses and disbursements – what’s the difference?
As a contractor you may incur costs in the process of supplying services to your clients. Where the costs are relevant you can pass these on by including them in your invoice. If you are VAT registered it’s important to understand the difference between HMRC’s definition of ‘expenses’ and ‘disbursements’ to ensure:
- your invoices to clients show the correct VAT treatment
- you are only claiming back VAT on allowable items
For invoicing purposes you must charge VAT on expenses you pass on to your clients. If you are using the flat rate VAT scheme you must also pay a percentage over to HMRC as you would with a normal invoice, so you may want to consider whether it’s worth staying on the scheme if you have a large amount of expenses.
HMRC defines expenses as ‘incidental costs that your business might incur’ when supplying goods or services to clients. These include goods or services purchased for your own use as a normal business cost. The key point in the definition is that a cost is defined as an expense only if you have not purchased the goods or services on behalf of your client, for the client’s use and benefit.
HMRC examples of an expense are:
- Travel to visit a client or travel to a job
- Postage costs when sending items to clients
If you have incurred expenses you can choose to itemise these separately on your invoice as ‘recharges’. These are subject to VAT. You will have to charge VAT on these even if you yourself did not pay VAT on the items.
You can claim back the VAT on items you purchased for you and not your client, even if you passed the costs on as a recharge. You must provide a VAT invoice for each item you claim. Your client can also claim back the VAT you charged them on your invoice if they are VAT registered.
For invoicing purposes costs incurred for disbursements are left out of the VAT calculation.
HMRC defines disbursements as costs you incur when buying goods or services on behalf of your client, for their use and benefit. In this respect you are deemed as acting as an agent for your client.
For the cost to be a disbursement it must be clear that the purchase was made on behalf of the client and must include the following HMRC criteria:
- you paid the supplier on your customer’s behalf acting as the agent of your client
- your customer received, used or had the benefit of the goods or services you paid for on their behalf
- it was your client’s responsibility to pay for the goods or services, not yours
- you had permission from your customer to make the payment
- your customer knew that the goods or services were from another supplier, not from you
- you show the costs separately on your invoice
- you pass on the exact amount of each cost to your customer when you invoice them
- the goods and services you paid for are additional to the services you’re invoicing your client for performing yourself
If you paid VAT for goods and services you purchased on behalf of your client and treated it as a disbursement on your invoice you cannot claim back the VAT. Your client can only claim back the VAT if they have a valid VAT invoice.
In many cases the difference between an expense and a disbursement will be quite clear. However, if you are unsure of the correct VAT treatment for any items, contact your contractor accountant for guidance. For more information on the expenses you’re entitled to claim as a Limited Company contractor, Limited Company Help have a fantastic guide on Limited Company expenses – what can you claim for? Read it for free here.
This blog has been prepared by Intouch Accounting. While we have made every attempt to ensure that the information contained in this blog has been obtained from reliable sources, Intouch is not responsible for any errors or omissions, or for the results obtained from the use of this information. This blog should not be used as a substitute for consultation with professional accounting advisers. If you have any specific queries, please contact Intouch Accounting.