Travel expenses and VAT

July 4th 2022

During routine checks, HMRC looks for mistakes which businesses commonly make. One such area is the VAT treatment of travel expenses. What should you check to ensure your VAT returns are correct?

One error often made by businesses that provide professional services involves passing on their employees’ travel expenses to their customers.

The following example illustrates the problem.

ABC Ltd has clients all around the UK. Its standard terms state that its fees are based on time spent by its staff, plus expenses they incur if required to travel to meet the client. When ABC sends a bill it itemises any rechargeable travel costs and sends receipts for these. It believes by doing so it can treat the expense as a VAT disbursement. HMRC’s practice is that disbursements are not part of the supply of services and therefore not subject to VAT. For example, if ABC’s bill included £150 (zero-rated) for rail fares it can simply include this as an item on the bill without adding VAT.

However, as outlined in the disbursement criteria below, ABC Ltd is wrong. Several conditions must be met for an expense to be treated as a disbursement. At least one of these is not met in the circumstances described in the example above. Therefore, ABC should add VAT to the £150 travel cost recharged.

VAT Disbursement
When you make payments on behalf of your customers, for goods or services received and used by them, you might be able to treat these payments as ‘disbursements’ for VAT purposes. This means that you:

• don’t charge VAT on them when you invoice your customer
• can’t claim back any VAT on them
However, the following criteria must be met in order to justify the costs incurred on behalf of your customers as a disbursement:
• That you paid the supplier on behalf of your customer and acted as the agent of your customer.
• That your customer received, used or had the benefit of the goods or services which you had paid for on their behalf.
• It was your customer’s responsibility to pay for the goods or services and not yours.
• That you had received permission from your customer to make the payment.
• That your customer knew that the goods or services were from another supplier and not from you.
• That you show the costs separately on your invoice to the customer.
• That you pass on the exact amount of each cost to your customer when you invoice them.
• That the goods and services you paid for are in addition to the cost of your own services.
It’s usually only an advantage to treat a payment as a disbursement if the supplier didn’t charge VAT on it, or if your customer can reclaim the VAT.

If you recharge staff travel expenses to your customers, it is not a disbursement and therefore you must add VAT. Public transport fares don’t include VAT so there’s nothing for you to reclaim.