When you pay a third party for goods or services that are received and used directly by your customer, these payments may qualify as disbursements for VAT purposes. If a cost is a genuine disbursement:
- you do not charge VAT when recharging it to the customer, and
- you cannot reclaim any VAT charged by the supplier.
What is a Disbursement?
A cost can be treated as a disbursement (i.e., outside the scope of VAT and not part of your taxable supply) only if all of the following conditions are met:
- The supplier’s cost was incurred on behalf of your client
- You acted as an agent, not as a principal.
- You were simply passing on a cost that legally belonged to them.
- Your client received the goods or services directly
- The underlying supply is made to your client, not to you.
- The contract is between the third-party supplier and your client.
- Your client was responsible for paying the supplier
- Even though you may have paid initially, it should have been your client’s liability.
- You had your client’s clear authority to pay the supplier
- Your role was to pay on their behalf.
- Usually demonstrated by engagement terms or explicit instruction.
- You did not use the goods or services yourself
- You gained no benefit.
- You simply passed through the cost unchanged.
- You pass on the exact amount you were charged
- No uplift, markup, admin fee, or alteration.
- Disbursements must be recharged at cost.
- The cost is itemised separately on your invoice
- It must be distinguishable from your own fees and expenses.
- You keep evidence showing it was a cost incurred on behalf of the client
- Typically the original third‑party invoice.
What Isn’t a Disbursement?
Many routine business costs, such as travel and postage, do not qualify as disbursements and must be included in your VAT calculation when recharged to a customer. These are costs you incur in supplying your own services and are not disbursements. If you choose to itemise such costs, they are treated as recharges, not disbursements, and you must charge VAT on them regardless of whether the underlying cost carried VAT.
Examples
Typical examples of true disbursements are Companies House filing fees, court fees, planning application fees paid on behalf of a client and search fees in conveyancing.
Examples and non-disbursements (these are recharges with VAT) are travel expenses, postage and stationery, software subscriptions you use in delivering your service and outsourced subcontractor fees (benefit to you, not the client).
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.