Understanding the difference between a reimbursement and disbursement is imperative to get the VAT treatment correct.
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.