It is a common practice in some trades and professions to reflect certain charges or costs incidental to making a supply separately on an invoice or tax invoice issued to customers. Examples include travel costs (such as airfare, petrol, toll fees), delivery charges, accommodation costs and meals. These additional amounts are labelled using different words such as “disbursements”, “costs”, “reimbursements”, “recoveries”, “recharges” and various other names. These words do not all have the same meaning and are often the source of disputes between parties. The question that arises in these cases is whether such separately specified amounts must be included in the consideration charged by the supplier when calculating the VAT which is due on a supply, or not.
There are essentially two types of situations which arise in this regard. For the purposes of this article, we will refer to items specified on the supplier’s invoice or tax invoice as being either “costs” (being the costs for which the supplier is liable) or “disbursements” (being costs for which the customer is liable). The other terms which are commonly used to describe such separate items should therefore be understood and categorised accordingly.
“Costs” refer to a situation where the supplier is integrating its own costs of making a supply into the final VAT-inclusive price charged to the customer. By reflecting the additional cost items separately on the invoice or tax invoice, the supplier is merely showing the customer what sort of specific expenses had to be incurred in order to make the supply. Depending on the terms and conditions of the contract, the supplier may be required to prove the costs, or to provide details as to how those costs were calculated. In this case, the VAT incurred on the separate supplies acquired by the supplier is for the supplier to deduct as input tax (provided the normal documentary requirements are met and they are not denied inputs). Therefore, where costs are incurred by the supplier to make a supply, VAT must be charged on all components separately listed as part of the final VAT-inclusive price.
“Disbursements” refer to a situation where the supplier has paid for specific expenses and supplies which are the responsibility of the customer. In this situation, the supplier acts on behalf of, and with the permission of, the customer to acquire certain goods or services from a third person on the customer’s behalf. The supplier then recovers the exact amount outlaid (including any VAT) by including it as a disbursement on the invoice or tax invoice. In this case, the VAT incurred on the separate supplies acquired by the supplier as agent for the customer is for the customer to deduct as input tax (provided the normal documentary requirements are met and they are not denied inputs). It would be expected in such a case that the third-party supplier would issue the tax invoice directly to the customer to support a claim for input tax, or it could be issued to the supplier (acting as agent of the customer) and then the supplier would, in turn, provide the tax invoice to the customer (or a statement as contemplated in section 54(3)). Therefore, where separate amounts correctly characterised as disbursements are indicated on an invoice or tax invoice to the customer, no VAT should be charged on that part as the VAT has already been charged by the third-party supplier to the customer and invoiced separately.
From the above explanations, it should be clear that the categorisation of expenses as being either “costs” or “disbursements” will depend on the contractual terms and conditions under which the supplier has been engaged. The VAT effect of each is completely different, so it is very important that when the supplier engages third parties in the process of making supplies to the customer, the capacity in which the supplier acts is clearly understood (that is, whether acting as principal, or as agent of the customer).
Example 1 – Costs incurred by the supplier
Vendor A is a property developer based in Cape Town. Vendor A engages the services of a geologist (Vendor B) who is based in Johannesburg to carry out a geological survey of a piece of land situated in Cape Town in connection with the potential development of a new shopping centre. The work will span over a period of one week. As part of the agreement, Vendor A agrees to “cover the cost” of Vendor B’s travel, accommodation and any incidental expenses within certain limits which Vendor A will incur whilst working on the project. Such expenses may include airfare, hotel accommodation and meals, car hire, toll fees, laundry charges, petrol and other incidentals. The contractual understanding of the meaning of “cover the cost” is that Vendor B will be allowed to add certain cost items to the bill over and above the standard charge for the geological services upon completion of the work.
The consequence of this arrangement is that when Vendor B issues the invoice or tax invoice for the geological survey, a number of additional cost items will appear on the bill (as agreed). The additional costs are for goods or services acquired by Vendor B in the course of carrying out the geological survey, and if any of those expenses include VAT, Vendor B will be entitled to claim the VAT thereon as input tax, subject to the usual documentary requirements and provided they are not denied inputs. When calculating the consideration to be billed to Vendor A, the charge for the geological services and all the agreed “costs” must be added up and included in the final VAT-inclusive price. Whether a particular amount constitutes a “cost”, how it is calculated, and whether or not that cost to the supplier included any VAT which was deductible as input tax in the hands of Vendor B is something that should be agreed between the parties.
Example 2 – Disbursements made by the supplier on behalf of the customer
A few years later, Vendor A in Example 1 engages the services of Vendor C who specialises in the supply and installation of escalators at shopping centres. Vendor C normally charges for the supply of the escalators and the installation services at a delivered price. Deliveries are normally done by a separate transporter, Vendor D. Any additional work not within the project specification is agreed to be for the account of Vendor A and will be carried out by preferred supplier Vendor E. Vendor C agrees to act as the paymaster for Vendor A in respect of any additional work that Vendor E carries out and contracts with Vendor E accordingly.
In this example, Vendor C will supply the escalators and installation services at a delivered price. Therefore, the delivery charges by Vendor D are for the account of Vendor C. If the delivery charges are shown separately on the invoice or tax invoice issued to Vendor A, they should not be shown as a disbursement. Vendor C will accordingly be able to deduct the VAT on the delivery charges provided the normal documentary requirements are met.
Vendor C will not be entitled to deduct any input tax on the consideration paid to Vendor E for the additional work carried out. The reason is that Vendor E’s charges are for the account of Vendor A (as agreed). Vendor C merely contracted with Vendor E as paymaster and agent of Vendor A in that regard. Vendor C must therefore issue a statement as contemplated in section 54(3) to Vendor A which will serve as documentary proof for any input tax claim that may be available. Vendor E’s tax invoice could also be passed on to Vendor A if required, or it can be held by Vendor C as the agent (if agreed by the parties). If any amount paid to Vendor E is shown on Vendor C’s invoice or tax invoice it must be shown as a disbursement. This applies whether funds were advanced by Vendor A to Vendor C for that purpose, or if Vendor C paid from their own funds and later recovered the exact amount outlaid on behalf of Vendor A.
Source: gov.za
