Disbursements and VAT: A Complete Guide for Professionals

The management of disbursements and VAT represents a major challenge for professionals, particularly lawyers and other service providers. This complex tax issue requires a thorough understanding to avoid processing errors and optimize accounting management.

What is a VAT claim?

A disbursement is a sum of money advanced by a professional on behalf of his client. They are expenses incurred in the name and on behalf of the client, which must be reimbursed in the same way. Disbursements differ from general business expenses in that they are specific in nature and are allocated directly to a particular client.

Essential features of Debours

Debours have several fundamental characteristics:

• Advance payment on behalf of the customer
• Reimbursement to the nearest euro
• Supported by accounting documents
• Separate accounting entry

Handling VAT on disbursements

The VAT regime applicable to disbursements is governed by article 267 II-2° of the French General Tax Code and tax instruction BOI-TVA-BASE-10-20. In principle, disbursements are excluded from the VAT tax base, whereas standard services are subject to the 20% rate. To illustrate, let’s take the example of a lawyer who incurs court fees of €100 for his client:

• Scenario with disbursements: the €100 are billed exclusive of VAT
• Scenario with no outlay: the €100 would be subject to VAT at 20%, i.e. €120 inc.

The different VAT rates applicable in France vary according to the nature of the operations:

• Standard rate: 20% (standard services)
• Intermediate rate: 10%.
• Reduced rate: 5.5
• Special rate: 2.1

In the case of professional services, the distinction between disbursements and rebilled expenses is crucial to the VAT recovery mechanism. Here’s an example: for a lawyer’s fee of €1,000, including €200 in disbursements:

• VAT base: 800€ (1000€ – 200€ disbursements)
• VAT at 20%: €160
• Total invoice: 1160€ (800€ + 160€ VAT + 200€ disbursements)

Practical aspects of VAT returns

The declaration of VAT disbursements requires particular attention when completing the CA3 declaration. Professionals must make a clear distinction between disbursements and other transactions in their periodic declarations.

For optimum management, we recommend :

• Identify disbursements separately on the CA3 tax return under non-taxable transactions.
• Keep detailed records of disbursements to facilitate tax reporting
• Correctly apply the rules specific to special VAT regimes

The treatment of disbursements can have a significant impact on the calculation of the VAT prorata. These amounts, which are excluded from the tax base, must be taken into account when calculating the ratio that determines the right to deduct.

Special cases, such as international transactions or services subject to special regimes, call for heightened vigilance and may require specific reporting to the tax authorities.

Conditions for VAT exclusion

To qualify for VAT exemption, disbursements must meet the following criteria:

Distinction between Disbursements and Recharged Expenses

It’s crucial to distinguish between out-of-pocket expenses and simple rebilled expenses. Invoiced expenses are included in the VAT tax base, while disbursements are not. This distinction has a direct impact on the tax and accounting treatment of the sums in question.

Practical examples from Debours

In professional practice, there are several common types of disbursement:

• Registration fees
• Court fees
• Bailiff’s fees
• Legal advertising costs

Impact on Accounting and Billing

Disbursement management requires a precise technical approach to accounting and invoicing. Professionals must set up a rigorous monitoring system that complies with specific accounting standards:

Accounting for disbursements

Disbursements must be recorded in dedicated transit accounts:

• Use of account 467 “Sundry debtors and creditors” to track disbursements
• Example of an accounting entry :
  • Debit 467 – Customer disbursement / Credit 512 – Bank (on advance)
  • Debit 512 – Bank / Credit 467 – Customer disbursements (on repayment)

Invoice presentation

Invoices for out-of-pocket expenses must include :

• A separate section clearly identified as “Debours”.
• Details of sums advanced with supporting documents
• The words “Debours – Amounts advanced on behalf of the customer”.
• Amount exclusive of VAT, applicable VAT, and out-of-pocket expenses

Computer processing

In accounting software :

• Specific settings for disbursement accounts
• Invoice template configuration with disbursements/honoraria distinction
• Set up disbursement tracking reports by customer
• Automated generation of accounting entries

Management tools and software

Efficient management of disbursements and VAT requires the use of appropriate IT tools. Professionals can rely on specialized accounting software with modules dedicated to disbursements. These solutions generally integrate essential functions such as real-time tracking of advances, automatic generation of accounting entries and management of receipts.

Essential features include :

• Creation of transit accounts dedicated to disbursements
• Automated tracking of customer reimbursements
• Issue compliant invoices with a clear distinction between disbursements
• Electronic document management (EDM)

Automated accounting processing considerably reduces the risk of errors, while optimizing processing time. Integrated dematerialization solutions facilitate the storage and retrieval of supporting documents, meeting tax authorities’ document retention requirements. These tools can be connected to e-filing platforms for optimized tax management.

Risks and disputes related to disbursements

Incorrect classification or treatment of disbursements can have serious tax consequences. The tax authorities may call into question the tax treatment applied and reinstate the sums in the VAT tax base if the conditions are not met.

Practical recommendations

To secure the processing of disbursements, it is recommended to :

• Systematically formalize the customer’s mandate
• Keep all supporting documents
• Detailed invoicing
• Set up a specific monitoring procedure

Conclusion

The management of disbursements and their VAT treatment requires particular attention and a good command of the applicable tax rules. A rigorous, methodical approach helps to avoid the risk of tax adjustments, while optimizing the accounting and tax management of your professional activity.