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HMRC internal manual

VAT Taxable Person Manual

Issues to consider: agency and disbursements: revenue risks associated with disbursements

Traders often view payments which they make to third parties as disbursements on behalf of the client, whereas in reality these costs were incurred by themselves in the course of making their own supply of agency services and should have formed part of the value of their invoice to the client. Particular risks are:

  • where the expenses or overheads of agents are reimbursed by their principals. These are sometimes incorrectly treated as disbursements. In fact, the supply was to the agent, who should reclaim input tax and build the value into his own supply of agency services;
  • where, in the course of making their own supply, agents receive goods or services from unregistered suppliers, these are sometimes incorrectly disbursed by the agent to the principal. This is particularly a risk where any output tax charged by the agent for his services will not be fully deductible by the principal.

The key point is that some agents may seek to disguise as disbursements costs which they incur in relation to goods and services which they themselves use in making their own supply to their principal. For these reasons it is vital that you correctly identify a disbursement and only allow this procedure where it is justified. The eight conditions in VTAXPER39000 have been developed to help you do this.