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Explaining the difference between disbursements and recharged expenses (VAT implications)

Sophie Carter-Lunn avatar
Written by Sophie Carter-Lunn
Updated over a week ago

Introduction

For small businesses in the United Kingdom, every penny counts. It's crucial to manage expenses efficiently and understand the tax implications associated with different financial transactions. Disbursements and recharged expenses are two concepts that can significantly impact a small business's financial health. In this article, we'll delve into how these concepts intersect with taxes and provide valuable insights for small businesses to navigate them effectively.

Understanding Disbursements: Keeping Taxes in Check

What are Disbursements? Disbursements refer to costs incurred by your small business on behalf of clients or customers, which are then separately charged to them. While they don't contribute to your business's revenue, they help you recover the direct expenses incurred. To qualify as a disbursement, a few key criteria must be met:

  1. Expense Benefit: The expense must directly relate to services or products provided to a client, showing the benefit they receive.

  2. Client Responsibility: The client must bear legal responsibility for reimbursing your business for the incurred expense.

  3. Itemized Billing: The expense should be clearly outlined on the client's invoice, specifying the exact amount paid on their behalf.

Tax Implications of Disbursements: From a tax standpoint, disbursements are typically not counted as part of your business's income so therefore no VAT needs to be applied to these. The net impact of these should be nil so no impact on your Corporation Tax bill.

Navigating Recharged Expenses for Small Businesses

What are Recharged Expenses? Recharged expenses are costs that you bear while working for your clients such as subsistence and travel that your client may agree to reimburse as part of your agreed fee.

Tax Implications of Recharged Expenses: VAT needs to be applied to any recharged expenses if you are VAT registered. It is treated as part of your service and if you are VAT registered its part of your deemed supply. This applies whether or not the expense being recharged included VAT or not.

As a small business owner in the UK, understanding how disbursements and recharged expenses intersect with taxes is essential for managing your finances effectively. By adhering to best practices, keeping detailed records, and seeking advice from tax experts, you can ensure that your small business navigates these financial intricacies while staying compliant with tax regulations. Ultimately, this knowledge empowers you to make informed financial decisions and keep your business's bottom line in check.

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