Businesses often pay costs connected with work carried out for their customers. Some of these payments may qualify as VAT disbursements, while others are simply business expenses that are recharged to the customer.
The distinction is important. A genuine disbursement can normally be excluded from the amount on which VAT is calculated. A recharge is part of your own supply and must normally follow the VAT treatment of that supply.
Calling an item a disbursement on an invoice does not automatically make it one. The contractual arrangement, the identity of the person who received the goods or services and the way the cost is passed on must all be considered.
This guide explains the difference between VAT disbursements and recharged expenses, when VAT can be reclaimed and how the items should appear in your bookkeeping and customer invoices.
What Is a VAT Disbursement?
A disbursement is a payment that your business makes to a third-party supplier on behalf of a customer.
The customer, rather than your business, receives and uses the underlying goods or services. Your business acts only as the customer’s agent by making the payment and recovering the exact amount from them.
Where all the required conditions are satisfied, the payment can normally be treated as outside the VAT calculation. This means that you:
- Do not add VAT when recovering the disbursement from your customer.
- Do not reclaim any VAT charged by the third-party supplier.
- Show the disbursement separately on your customer invoice.
- Recover only the exact amount paid to the third party.
The Eight Conditions for a VAT Disbursement
HMRC requires all eight conditions to be satisfied before a payment can be treated as a disbursement.
- You paid the third-party supplier on your customer’s behalf and acted as your customer’s agent.
- Your customer received, used or benefited from the goods or services.
- Your customer was responsible for paying for the goods or services.
- Your customer gave you permission to make the payment.
- Your customer knew that the goods or services were supplied by another business rather than by you.
- You show the cost separately on the invoice you issue to your customer.
- You pass on the exact amount paid, without adding a fee or profit margin.
- The third-party goods or services are additional to the cost of your own services.
If even one of these conditions is not satisfied, the cost may need to be treated as part of your own supply rather than as a disbursement.
A Simple Way to Identify a Disbursement
Ask who was actually buying the goods or services from the third-party supplier.
If your customer was the buyer and you merely paid the supplier as the customer’s agent, the payment may qualify as a disbursement.
If your business bought or used the goods or services to complete its own work, the cost is normally a recharge.
| Question | Likely Disbursement | Likely Recharge |
|---|---|---|
| Who contracted with the supplier? | The customer, with your business acting as agent. | Your business. |
| Who received or used the supply? | The customer. | Your business while completing its work. |
| Who was responsible for paying? | The customer. | Your business. |
| Is the exact cost passed on? | Yes, with no markup. | Not necessarily. A fee or markup may be included. |
| Is it separate from your own service? | Yes. | No. It forms part of delivering your service. |
| Can your business reclaim the supplier’s VAT? | No. | Potentially, subject to the normal input VAT rules. |
Examples of Genuine VAT Disbursements
Whether a payment qualifies depends on the precise agreement between the business, customer and supplier. Potential examples can include:
- A statutory registration fee paid to a public body on behalf of a customer.
- A court fee paid by a solicitor where the client is responsible for the fee.
- A search fee purchased specifically in the customer’s name where the customer receives the search result.
- A website hosting package bought on a customer’s behalf, where the customer is the recipient and user of the hosting service.
- A licence or permit obtained for and supplied directly to the customer.
These examples qualify only where all eight conditions are met. A particular court fee, search, licence or hosting arrangement should not automatically be treated as a disbursement without reviewing the facts.
Why Building Materials Are Usually Not Disbursements
Materials purchased by a builder or contractor to complete a renovation are normally not disbursements.
The builder purchases and uses the materials to provide the construction service. The supplier normally invoices the builder, the builder is responsible for paying for the materials and the materials form part of the work supplied to the customer.
The builder may show the material cost separately on the customer invoice, but separating it does not turn the cost into a disbursement.
Instead, the materials form part of the consideration for the builder’s supply and normally follow the VAT treatment applicable to the construction work.
The same principle can apply to subcontractor costs, equipment hire and other expenses that the contractor incurs to complete the project.
What Is a Recharge?
A recharge is a cost incurred by your business that you pass on to a customer.
The goods or services were supplied to your business and used by your business while providing its own goods or services.
Typical recharges include:
- Train, bus, taxi and air travel used to visit the customer or complete a job.
- Mileage and vehicle costs.
- Hotel accommodation used by you or your employees.
- Postage and delivery costs incurred by your business.
- Bank-transfer fees charged to your business account.
- Materials used to complete customer work.
- Software used by your business to provide its service.
- Subcontractor or freelance costs incurred as part of your own supply.
- Printing, copying and administrative costs.
- Telephone and communication expenses.
You may show these costs separately on your customer invoice, but they remain part of the amount charged for your own supply.
Do You Charge VAT on a Recharge?
A recharge normally follows the VAT liability of the goods or services you supply to the customer.
Where your main service is standard-rated, you will normally charge standard-rate VAT on the recharged cost, even if:
- The original supplier did not charge you VAT.
- The original cost was exempt from VAT.
- You pass on only the amount you paid.
- You show the cost separately on your invoice.
For example, a bank may charge your business an exempt transfer fee. If you recharge that fee as part of your standard-rated professional service, the recharge normally forms part of your taxable fee and is subject to VAT.
Similarly, a flight may not include UK VAT. If you purchased the flight so that you could visit a client and then recharge the cost, it normally forms part of your own service and is subject to the VAT treatment of that service.
Can You Add a Markup to a Disbursement?
A genuine disbursement must be passed on at the exact amount paid to the third-party supplier.
If you add a markup, administration fee or profit margin to the third-party cost, the additional amount is not part of the disbursement.
The markup will normally be consideration for a service supplied by your business and may be subject to VAT.
Depending on the arrangement, adding a markup may also indicate that the entire transaction is a recharge rather than a genuine disbursement.
When Can Your Business Reclaim VAT?
Your business may normally reclaim VAT where the goods or services were supplied to your business and used for its taxable activities, subject to the usual input VAT rules.
This means VAT may potentially be reclaimed on a recharge because the underlying purchase was made by your business.
To support the claim, your business should normally hold a valid VAT invoice issued by a VAT-registered supplier.
The invoice should normally identify your business as the customer and contain the required VAT details, including:
- The supplier’s name and address.
- The supplier’s VAT registration number.
- A unique invoice number.
- The date and tax point.
- A description of the goods or services.
- The net value.
- The VAT rate and amount.
- The total amount payable.
Input VAT recovery can be restricted where a purchase relates to exempt activity, private use, business entertainment or another blocked or partly recoverable category.
A receipt, statement, delivery note or pro-forma invoice is not normally a substitute for a valid VAT invoice.
When Can You Not Reclaim VAT?
Your business cannot reclaim VAT on a genuine disbursement because the underlying goods or services were supplied to the customer rather than to your business.
Your role was limited to paying the supplier as the customer’s agent.
To preserve this treatment, your bookkeeping should demonstrate that:
- The purchase belonged to the customer.
- Your business did not reclaim the supplier’s VAT.
- The exact amount was recovered from the customer.
- The amount was shown separately from your own fee.
- The other disbursement conditions were satisfied.
Can the Customer Reclaim the VAT?
A VAT-registered customer may be able to reclaim the VAT charged by the third-party supplier, subject to the normal input VAT rules.
The customer will normally need a valid VAT invoice or other acceptable evidence relating to the supply made to them.
Where you receive the third-party invoice on the customer’s behalf, it should be passed to the customer or retained in a way that allows the customer to support its VAT claim.
If the invoice is addressed to your business even though the item has been treated as a customer disbursement, the customer’s ability to reclaim VAT may be questioned. The invoicing arrangement should therefore be established correctly from the beginning.
How to Show Disbursements on an Invoice
A genuine disbursement should be shown separately from your own fee and from any recharged business expenses.
For example:
| Invoice Item | Net Amount | VAT | Total |
|---|---|---|---|
| Professional services | £1,000 | £200 | £1,200 |
| Travel recharge | £100 | £20 | £120 |
| Registration fee paid as agent | £75 | £0 | £75 |
| Total | £1,175 | £220 | £1,395 |
The registration fee is shown separately and excluded from the VAT calculation only because it satisfies all the disbursement conditions.
The travel cost is a recharge. It forms part of the professional service and is included in the taxable amount.
How to Record Disbursements in Your Bookkeeping
Disbursements should be recorded separately from ordinary sales and business expenditure.
A suitable process may involve:
- Creating a separate disbursement or client-cost account.
- Recording the payment without claiming input VAT.
- Linking the payment to the relevant customer.
- Recovering the exact amount through a separately identified invoice line.
- Keeping the supplier invoice, customer authority and related documents.
- Checking that the amount paid agrees with the amount recovered.
The bookkeeping treatment should make it clear that the amount was not part of your taxable fee and that no input VAT was claimed.
Recharges should be recorded differently. The supplier cost is normally recorded as a business expense, with eligible input VAT reclaimed, while the amount charged to the customer forms part of sales and output VAT.
Disbursements and the VAT Flat Rate Scheme
A genuine disbursement that satisfies HMRC’s conditions is normally excluded from Flat Rate Scheme turnover.
A recharge remains part of the business’s turnover and will generally be included in the Flat Rate Scheme calculation.
This makes correct classification particularly important for businesses using the scheme. Describing a recharge as a disbursement could understate the turnover used in the flat-rate calculation.
Records You Should Keep
Where a payment is excluded from VAT as a disbursement, you should retain evidence demonstrating why the treatment was appropriate.
Useful records can include:
- The agreement or engagement letter with the customer.
- The customer’s authority to incur and pay the cost.
- The third-party supplier’s invoice.
- Evidence showing that the customer received the goods or services.
- Evidence of the payment made to the supplier.
- Your invoice to the customer.
- Evidence that the exact amount was recovered.
- Bookkeeping records showing that no input VAT was reclaimed.
VAT records generally need to be retained for at least six years. Longer periods can apply in particular circumstances.
Common VAT Disbursement Mistakes
- Treating construction materials as disbursements: Materials used by a contractor to complete its own work are normally recharges.
- Assuming a separately itemised cost is automatically a disbursement: All eight HMRC conditions must still be met.
- Claiming input VAT on a genuine disbursement: The underlying supply was made to the customer, not to your business.
- Failing to charge VAT on a recharge: A cost can be taxable when recharged even if the original supplier did not charge VAT.
- Adding a markup to a supposed disbursement: Genuine disbursements must be recovered at their exact cost.
- Using an invoice addressed to the wrong party: This can undermine the disbursement treatment and the customer’s input VAT claim.
- Failing to obtain the customer’s authority: You must be acting as the customer’s agent.
- Combining the amount with your professional fee: A disbursement must be shown separately.
- Ignoring the contractual arrangement: The contract can help establish who was responsible for purchasing and receiving the supply.
- Keeping insufficient evidence: HMRC may ask why the amount was excluded from the VAT calculation.
VAT Disbursement Checklist
Before excluding a cost from your VAT calculation, confirm that you can answer yes to every question below.
- Was I acting as the customer’s agent?
- Did the customer receive or benefit from the third-party supply?
- Was the customer legally or contractually responsible for the cost?
- Did the customer authorise me to make the payment?
- Did the customer know that another supplier provided the goods or services?
- Will the cost be shown separately on my invoice?
- Am I recovering the exact amount paid?
- Is the third-party supply additional to my own service?
- Have I avoided reclaiming any VAT charged on the payment?
- Do I have records supporting the treatment?
If the answer to any of the first eight questions is no, the cost should not normally be treated as a VAT disbursement without further review.
How Carter Bookkeeping Services Can Help
VAT disbursements can be difficult to identify because the correct treatment depends on who bought, received and used the underlying goods or services.
Carter Bookkeeping Services can help businesses:
- Review existing disbursement and recharge processes.
- Separate customer disbursements from ordinary business expenses.
- Configure appropriate bookkeeping categories.
- Review the VAT treatment applied to recharged costs.
- Check whether input VAT has been claimed appropriately.
- Prepare reconciled records for VAT returns.
- Identify transactions requiring specialist VAT advice.
- Complete a holistic bookkeeping review of existing records.
The VAT treatment of agency arrangements and disbursements can be fact-specific. Complex or high-value transactions may require separate advice from a VAT specialist.
Frequently Asked Questions
Are Materials Bought for a Customer a Disbursement?
Usually not where your business purchases and uses the materials to complete its own supply.
For example, materials purchased by a builder for renovation work normally form part of the builder’s supply to the customer.
Is Travel Recharged to a Customer a Disbursement?
Usually not. If you or your employees travelled to provide your service, the travel was supplied to and used by your business.
The amount recharged to the customer normally forms part of the consideration for your service.
Is Postage a VAT Disbursement?
Postage purchased and used by your business to send its own documents or goods is normally a recharge rather than a disbursement.
A different treatment may apply where you purchase a separate postal service purely as the customer’s agent and all the disbursement conditions are satisfied.
Do I Charge VAT If the Original Expense Had No VAT?
Potentially, yes. If the cost is a recharge forming part of your taxable service, you normally apply the VAT treatment of your own supply.
The fact that the supplier charged no VAT does not automatically make your recharge VAT-free.
Can I Reclaim VAT on a Disbursement?
No. A genuine disbursement relates to goods or services supplied to your customer rather than to your business.
Can I Reclaim VAT on a Recharge?
Potentially. The purchase must have been supplied to your VAT-registered business, used for an eligible business purpose and supported by suitable evidence.
Does Showing a Cost Separately Make It a Disbursement?
No. Separate presentation is only one of the eight conditions. The customer must also be the recipient of the third-party supply, responsible for the payment and aware that it came from another supplier.
Can I Make a Profit on a Disbursement?
No. A genuine disbursement must be passed on at the exact amount paid. Any additional fee or markup is normally part of your own taxable service.
Do Disbursements Appear on a VAT Return?
A genuine disbursement is normally excluded from the VAT calculation because it is not consideration for a supply made by your business.
The payment and recovery should still be recorded clearly in the bookkeeping system so that the treatment can be supported.
Get the VAT Treatment Right Before Invoicing
The difference between a disbursement and a recharge depends on the underlying transaction, not the description entered on your invoice.
Establish who is contracting with the supplier, who receives the goods or services and who is responsible for paying before the cost is incurred.
Contact Carter Bookkeeping Services to discuss the bookkeeping and VAT treatment of costs passed on to your customers.