An Introduction to Disbursements and VAT
If you're a small business owner in the UK, it's important to have a basic understanding of disbursements and value-added tax (VAT). This blog post will provide a brief overview of both concepts so that you can make informed decisions about your business finances.
What are Disbursements?
In the simplest of terms, disbursements are funds that are paid out by a business on behalf of its clients. For example, if you run a catering business, the cost of food and supplies would be considered a disbursement. Disbursements are typically incurred during the course of providing a good or service to a client.
In the UK, there are two main types of disbursements: pre-payments and expenses. Pre-payments are payments made by the business before the work is completed (e.g., an advance payment for travel expenses). Expenses, on the other hand, are payments made after the work is completed (e.g., reimbursement for train tickets used for travel to a meeting).
Disbursements and VAT (Value-Added Tax) - how they work together
Value-added tax is a tax that is levied on most goods and services in the UK. The current standard rate of VAT is 20%. Small businesses must register for VAT if their sales exceed £85,000 in a 12-month period. Once registered, businesses must charge VAT on all taxable supplies of goods and services.
If you are a VAT registered business and have disbursements, it's important to note that disbursements are outside the scope of VAT.
Therefore, when you invoice that cost out to your client, you do not charge VAT at all (and if you are using Xero, you should set the VAT code to “No VAT”).
Because disbursements are outwith the scope of VAT, not only can you not charge VAT when you invoice the client, you also cannot reclaim VAT charged on the goods/services (again, in Xero this would be treated as “No VAT”).
Disbursements and VAT can be confusing concepts, but it's important for small business owners in the UK to have a basic understanding of both. By knowing what disbursements are and how to properly account for them, as well as being aware of your VAT obligations, you can ensure that your business finances are in good order.