Consultants rebill train fares, builders pass on skip hire, agencies charge clients for stock photography, and solicitors pay court fees on a client’s behalf. All of these are costs you pay and then get back from a customer, but HMRC treats them in one of two very different ways. Get the label wrong and you either undercharge VAT on your invoice or reclaim input VAT that was never yours.
Recharge or disbursement?
A recharge is part of your own supply to the customer. You bought the goods or services for yourself to do the job, and you are recovering the cost through your price. A disbursement is a payment you make as the customer’s agent for something the customer receives from a third party; it never becomes part of what you sell.
HMRC sets out the test in section 25 of VAT Notice 700. A payment is only a disbursement if all of these are true:
- you paid the third party as your customer’s agent;
- the customer actually received and used the goods or services;
- the customer was responsible for paying for them;
- the customer authorised you to make the payment;
- the customer knew the goods or services would come from a third party;
- the outlay is shown separately on your invoice;
- you recover only the exact amount you paid;
- the goods or services are clearly additional to what you supply yourself.
Fail one condition and the amount is a recharge. HMRC’s own examples of costs that can never be disbursements include your travel and subsistence, phone bills and postage, and an airfare for a consultant flying out to do the work: the customer does not receive those things, you do.
The VAT result in each case
Recharges take the VAT treatment of your main supply. If you are a VAT-registered consultant charging standard-rated fees, a £96 rail fare you rebill is standard-rated at 20% on your invoice, even though the fare itself carried no VAT. You reclaim any input VAT on the original cost in the usual way, provided the supplier’s invoice is addressed to your business.
Disbursements sit outside your supply. You charge no VAT on them, and you cannot reclaim any VAT shown on the third party’s invoice, because the supply was made to your customer. A typical case is an official fee an agent pays for a registration made in the client’s own name, where the client is the one who receives the result.
| Recharge | Disbursement | |
|---|---|---|
| Whose purchase | Yours | The customer’s |
| Your input VAT on the cost | Reclaimable if you hold a valid invoice | Not reclaimable |
| VAT on your invoice | Same rate as your main supply | None |
| Mark-up allowed | Yes | No, exact cost only |
| Shown on invoice | Can be bundled into the fee or itemised | Must be itemised |
Mark-ups and “admin fees”
Adding 10% to a cost before passing it on is a commercial decision and perfectly lawful, but it settles the VAT question: a disbursement must be recovered at exactly what you paid, so any mark-up turns the whole amount into a recharge. The same applies to a handling fee bolted onto a third-party cost. If you want to keep an item as a disbursement, charge your handling time as a separate line on your own fee.
Posting recharges
There are two defensible ways to record a recharge in your accounting software:
- Gross method. Post the original cost to its expense code and the rebilled amount to an income code such as Recharged costs or straight into sales. Turnover and costs are both higher, and the margin on recharges is visible. This is the cleaner choice when you mark up.
- Net method. Credit the rebilled amount back to the same expense code, so a fully recovered cost nets to nil. This suits genuine pass-through items at cost, but it hides the volume of activity.
Either way, the output VAT on the rebill is due. Pick one method per type of cost and write it down so the VAT codes in bookkeeping are applied consistently.
Posting disbursements
Because a disbursement is not your cost or your income, it should not touch the profit and loss account. Post the payment to a balance sheet account, for example Client disbursements recoverable, with a no-VAT or outside-the-scope code. When you invoice, the disbursement line credits that same account. Review it monthly: anything left on it for long is money you paid and never billed. For costs your own staff pay personally and claim back, which is a different question, see employee expense claims and reimbursement.
Evidence to keep
- the third-party invoice or receipt, and whom it is addressed to;
- the customer’s authorisation for disbursements (an engagement letter clause or an email);
- a reference on your sales invoice line that ties back to the original cost;
- your written mark-up or handling-fee policy for recharges.
Recharges between companies in the same group follow their own rules and documentation; see intercompany recharges and shared services. For what a compliant invoice must show, including itemised disbursement lines, read VAT invoice requirements.
Tagging each rebillable cost to a customer or project when you code the purchase makes it far harder to forget to bill. That can be tested on your own data in a free Nexbal trial.