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HMRC internal manual

VAT Taxable Person Manual

HM Revenue & Customs
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Issues to consider: agency and disbursements: how to recognise a disbursement - the eight conditions

Notice 700 The VAT guide sets out eight conditions that must all be fulfilled before you agree that a payment is a disbursement. These are that:

  • the person acted as an agent of his client when he paid the third party;
  • the client and not the agent used the goods and services supplied by the third party (in practice, this is usually the key condition);
  • the client was responsible for paying the third party;
  • the agent was authorised by his client to pay the third party on his behalf;
  • the client knew that the goods or services were to be provided to him by a third party;
  • the agent’s outlay is separately itemised when he invoices the client;
  • the amount recovered from the client is exactly the same amount as paid to the third party;
  • the goods or services paid for by the agent are clearly additional to the agent’s own supplies.

A trader must prove that he has met all the above conditions if he is to be entitled to exclude the payment from the value of his own supply. He must also be able to prove that he did not claim input tax on that payment. This will involve keeping separate records for disbursements. If arranging a supply of goods on behalf of his principal, the agent must of course have demonstrated that he is not required to treat the supply as to and by him under section 47(2A).

Although all eight conditions must be met, in practice the key to identifying whether the disbursement procedure can correctly be used is to determine whether the supply by the third party is genuinely made to the client and is not made to the agent who has then used the goods or services in making his own supply to the client. There are a number of legal precedents to assist.

  • The definitive case on disbursements is Rowe and Maw [1975] STC 340. In this, a solicitor argued that travelling expenses which he had incurred in the course of his duties for his client and then recovered at cost could be treated as a disbursement. Both tribunal and High Court held that the supply of travel was to the solicitor and not to the client, and formed part of the onward supply of legal services from solicitor to client.
  • This view was supported in Dalesid (LON/90/1941). In this, a bank granted a loan to the appellant on condition that certain of the bank’s expenses were met - for example the fees charged by surveyors. The tribunal supported our view that these costs were part of the bank’s expense in making the loan.

Input tax was thus not deductible by the bank, as it related to their exempt supply of making a loan; and when the bank invoiced their costs on to Dalesid, the whole charge was exempt, leaving no tax for Dalesid to deduct.

  • In Medical Services and Equipment Ltd (LON/94/1702A), the appellant, as a consultant, travelled around the world for a client hospital and alleged that his air fares and hotel costs should be treated as disbursements to the hospital. It was held that the air flight and hotel services were supplied to the consultant who used them in making his supply of consultancy to the hospital (an exempt body) which should bear VAT.