Is it a reimbursement or disbursement?

Reimbursements are subject to VAT whereas disbursements are not. 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.

For a payment to be treated as a disbursement there are a number of conditions which must apply;

you paid the supplier on your client’s behalf and acted as the agent of your client

your client 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 client to make the payment

your client 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 client when you invoice them

the goods and services you paid for are in addition to the cost of your own services.

The fundamental point to consider is whether the expense belongs to the supplier’s customer, rather than the supplier.

AJN Accountants are specialists in helping contractors, freelancers and small businesses to save tax and time.