What is a disbursement?
Disbursements allow you to “pass through” certain charges from a supplier to your customer without the charge being impacted by your VAT status and without adding to your sales total. For this to be possible, the following must be true:
- Your customer must have agreed in advance to reimburse you;
- Whatever is purchased by you must have been purchased on behalf of your customer and, although you may pay the supplier, you are acting as an agent and your customer is ultimately responsible for the payment;
- Your customer must receive all of the goods and services the disbursement is for;
- You must not have added any markup;
- You cannot claim something like mileage as a disbursement because you have used it while doing your job, the customer has not received it;
- A boiler for a central heating installation could be a disbursement but the customer would have needed to agree that in advance.
See VAT: costs or disbursements passed to customers guide and section 25 of VAT guide (VAT Notice 700)
When is it helpful to use disbursements?
There are some circumstances where disbursements are useful:
- You are VAT registered, your customer isn’t VAT registered and the supplier isn’t VAT registered. Treating the purchase as a disbursement avoids un-reclaimable VAT being charged.
- You are not VAT registered and might become so if all purchases that could be disbursements went through your books. Treating the purchase as a disbursement avoids you becoming VAT registered and having to charge VAT on everything.
- If your customer and the supplier are both VAT registered and you are not, it may be better for your customer to purchase directly from the supplier so they can reclaim the VAT. In this case, disbursements would not be used but this has the potential problems outlined next.
- Disbursements are a better way of handling some supplies than asking the customer to buy direct, as it avoids the customer buying the wrong thing or not getting materials delivered in time.
How do disbursements work?
You must agree upfront with your customer that they will be responsible for payment and whatever is being purchased must be used entirely by the customer. You cannot make anything a disbursement where it helps you to do the job rather than fully ending up with the customer. So, for instance, you cannot claim that mileage, accommodation or tool hire is a disbursement.
When you receive a supplier invoice you should pay the supplier and create a disbursement invoice to the customer for the total amount on the supplier invoice. Any VAT will be included in the amount charged but not itemised separately. If you are VAT registered and VAT is included in the supplier invoice you should not be using disbursements.
We suggest that you itemise on your quote anything you want to be treated as a disbursement with the heading “Disbursement” and with the following statement “Disbursements are items which we will purchase on your behalf acting as your agent and by accepting this quote you unconditionally agree that you are responsible for the payment of these items and they will be your property from the point they are purchased”.
How does Powered Now help?
Powered Now does not allow mixed invoices where some lines are disbursements and some lines are not disbursements. You must treat an entire supplier invoice as a disbursement and create an exact matching sales invoice which is sent to the customer. Powered Now automates this step.
The way that you create a disbursement in Powered Now is as follows:
- Switch on Disbursements at Settings > CIS & Cost > Allow disbursements;
- Agree with your client that they will be paying for certain supplies through you and where you will apply no markup (see suggested wording above);
- Create a supplier invoice recording details of your supply;
- After you have confirmed the supplier invoice, open it to its full view and go to Options > Disbursement, and then after that go to Options > Create Sales Invoice and send this to your customer.
That’s it!
Disbursements can be exported from Finances | Accounts Export. They are excluded from projects totals, financial reports and extracts of normal invoices. As a result, they will not appear in your accounting reports or your sales for VAT purposes. Payments made and received for disbursements are included in your payments reports so they can be reconciled with the bank.