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VAT and Disbursements

This article is based on tax law for the year ending 29 February 2024.

"Attorney disbursements, when correctly categorized and stated separately on invoices, should not have additional VAT charged as it's already been included in the separate invoice from the third-party supplier, as per Section 54 of the VAT Act."


Response:

The statement is true, but only if it is clear that the attorney's "disbursements" have been incurred by the attorney acting as an agent on behalf of the attorney's client. Where the "disbursement" has been incurred by the attorney as principal, then the recovery of the expense, even if styled a "disbursement" and stated separately on the attorney's invoice, is subject to VAT and the attorney must account for such VAT as output tax in his or her hands. Unfortunately far too many attorneys treat all recoveries of expenses as VAT-neutral "disbursements." It must be clear that the attorney has acted as an agent in the legal sense on behalf of his or her client before the statement above will find application.

Note re VAT treatment of disbursements:

If a true disbursement, being a recovery of an expense incurred by you as agent acting on behalf of a principal about the supply (i.e. you have incurred an expense on behalf of another person and that person could be held liable for payment of the expense), you must not account for any VAT about that supply. In essence, you, as an agent, have not made any supply to the principal and you have therefore not incurred any output tax liability about the relevant supply. Similarly, the supplier has not made any supply to you, as you are merely acting as an agent on behalf of your principal, so you may not claim any input tax deduction about the supply made to you as an agent. The VAT law specifically states that if a supply has been made to you as an agent who is acting on behalf of another person (i.e. the principal), the supply is deemed to have been made to the principal, and not you as an agent (section 54(2) of the Value-Added Tax Act – the VAT Act).

The following rule of thumb may assist you in determining whether the recovery of the expense incurred by you is a true agency disbursement or merely a recovery of an expense incurred by you as principal.

  • Have you paid the supplier as an agent on your customer's behalf?
  • Did your customer receive, use or have the benefit of the goods or services you paid for on your customer's behalf?
  • Was it the responsibility of the customer to pay for the goods or services, not yours? Stated differently, if payment was not made could the supplier sue you for payment or the customer?
  • Did you pass on the exact amount of each expense to your customer when you invoiced the customer?

If the answer to each of the above questions is yes, then the recovery of the expense paid by you is very probably a VAT-neutral (i.e. no output tax or input tax must be accounted for by you) recovery of disbursement.

The VAT Act further prides that where a tax invoice has been issued to the agent in the circumstances described above, the agent is required to maintain sufficient records to enable the name, address and VAT registration number of the principal to be ascertained. In addition, the agent is required to notify the principal in writing using a statement within 21 days of the end of the calendar month during which the relevant supply was made containing the following information:

  • a full and proper description of the goods or services or services supplied;
  • the quantity or volume of the goods or services supplied;
  • either, (a) the value of the supply, the amount of tax charged and the consideration for the supply, or (b), where the amount of VAT charged is calculated by applying the tax fraction (15/115) to the consideration for the supply (i.e. the consideration is inclusive of VAT), either the amount of VAT charged or a statement that the consideration includes VAT and the rate at which VAT is charged (section 54(3)(a), read with section 20(4), of the VAT Act).

The principal may then, based on the prescribed written statement issued by the agent, claim input tax relief where applicable. That is, the principal need not be put in possession of the tax invoice issued by the supplier to the agent to claim input tax relief, the written statement will suffice (section 16(2)(e) of the VAT Act).

However, in practice, there are many instances where a VAT vendor incurs expenses that, while contractually recoverable from the vendor's clients, are in the first instance for the account of the vendor. These include items like travelling expenses, delivery, printing, etc. While often specified as recoverable "disbursements", the underlying supply has in essence been made to you as a principal and not as an agent acting on behalf of a person who is a principal about the supply. It follows that should a supply be made to you as principal (i.e. you are contractually the counterparty to the supply), the recovery of the expense incurred by you is subject to VAT in your hands notwithstanding that the parties may regard the expense recovered as a "disbursement", that is you must charge and account for output tax in respect of the so-called disbursements received from your client. You will however be entitled to claim input tax relief based on the tax invoice issued to you unless one or other prohibitions apply (e.g. where you have acquired the relevant goods or service otherwise than to make a taxable supply).

It is also worth noting that where a non-taxable supply has been made to you as principal if that cost is recovered as part of the consideration for a taxable supply made by you, VAT must be accounted for in respect of that cost – even if recovered separately. The non-taxable supply has been made to you and not your customer.

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