You often use a third party supplier to handle specialist aspects of work you do for customers. When passing on the third party’s charges what’s the correct VAT treatment?

VAT by name and nature

If you’ve ever wondered why the name Value Added Tax was chosen to replace its predecessor “purchase tax”, the reason lies in the way VAT works. Usually, each step in a supply chain adds to the value of the goods or services and VAT applies at each of these. But it’s only the final customer in the chain that foots the tax on the “value added” price. So the name is a handy reminder that where a supply fits in the chain is important. The trouble is it’s not always clear.

Who’s making the supply?

There are situations where you may be a conduit for a supply made to your customer by someone else. For example, search fees paid by a solicitor in connection with their client’s property purchase. Usually, these don’t add to the value of the solicitor’s fees, they just pay them and pass the cost on to their client. This could equally be true of a double glazing firm which contracts a builder on your behalf to do the window fitting preparation. HMRC accepts this type of cost as a disbursement, i.e. a supply to your customer by the other business rather than part of your supply.


For an expense to count as a disbursement it must be clear that the supply by the other business is separate from yours, even though your customer pays you for it. HMRC sets conditions for this:

  • the goods or services must be distinct from yours and supplied to and for your customer
  • you must identify the cost separately on your bill and provide the other business’s invoice showing your customer’s name; and
  • your customer must be aware that you are only paying the bill on their behalf and they are therefore ultimately responsible for it.

Are you obliged to pay disbursements?

There’s no obligation to account for disbursements in the way we’ve described. You can instead treat them like other costs you incur such as materials, delivery charges and overheads. Usually, it’s less hassle for you to do it that way. On the other hand, using the disbursement rules might work to your and your customer’s advantage.

Customer advantage

If your customer isn’t registered for VAT, or is registered but partially exempt, and there’s no VAT payable on the expense involved, treating it as a disbursement will save them money.

Example. Sadie is having new windows fitted to her home by Acom Ltd, a VAT registered company, but the property needs some of the brickwork repaired first, which it can’t do. The builder quotes £1,000 for the job with no VAT as he’s not registered. Acom wraps up the cost into its bill. If the conditions are met, Acom can treat the £1,000 as a disbursement instead of adding the value to its bill. This saves Sadie £200 (£1,000 x 20% VAT).

Tip. By reducing the cost to Sadie, Acom’s quote for the work is likely to be more competitive compared with other VAT-registered firms who add the value of the subcontract work to their supply and charge VAT on the lot.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit or call 01233 653500.