VAT returns can lead to sleepless nights – especially when there are confusing differences such as expenses and disbursements.
While many people class each expenditure as the same thing, the two are different. And it really matters how they are treated.
As ever with VAT, it can be a headache, but we hope this guide will help.
Expenses and disbursements
There are subtle differences between the two and not treating them correctly on VAT returns often leads to mistakes. HMRC has the authority to review how you’ve been treating VAT for four years if they find any discrepancies. To avoid penalties, it’s crucial you know the difference.
What are expenses?
It sounds pretty clear, but some people confuse legitimate business expenses. These occur when spending on goods and services to carry out your company’s work. This includes stationery, overnight stays and travel. Be aware that not all expenses accrued by a business are tax deductible.
What are disbursements?
The are what you pay for on behalf of a client or customer that you will later get back as a disbursement.
Examples of disbursements
Marketing companies provide great examples of a disbursement. If your business uses a marketing agency, they may book advertising in a business magazine or on Facebook. As they have knowledge, it can be easier for them to do this for you. The agency may pay for your advertising and then invoice you for those costs.
VAT and disbursements
If you’re carrying out work for clients, it’s essential you treat disbursements and expenses differently. It’s fairly simple but you have to understand which is which. Here are the differences when it comes to VAT:
- As disbursements are recharged to a client, they are not VATable!
- You can charge VAT on expenses
Disbursements are not part of your service, so you cannot charge VAT to your clients. Ss a result, that means you cannot claim VAT back on your VAT return. As the customer is reimbursing you for the full cost, including VAT, you can’t claim because it means you’re receiving the money twice!
Your client will need to include the VAT paid on their own VAT return. They may ask you to provide evidence that VAT was originally paid.
If you’re still unsure about how to treat expenses and want help, speak to our experienced team.