Disbursements vs recharges for VAT

A disbursement for VAT is a payment you make as your client’s agent for something the client receives and uses, passed on at exactly the amount paid; it sits outside your own supply and you add no VAT. A recharge is a cost you incurred in making your own supply, such as your travel or postage, and it forms part of the value of that supply, so it carries VAT at the same rate as your fee even if the original cost had no VAT on it. All eight of HMRC’s conditions must be met for disbursement treatment, which is why most recharges are not disbursements.

What is the difference between a disbursement and a recharge?

HMRC’s guidance on costs or disbursements passed to customers draws the line by asking who received the goods or services. If the customer bought and received them and you simply paid on their behalf as their agent, the payment can be a disbursement. If you bought them for use in your own business while doing the work, they are your costs. Showing them separately on the invoice does not change that: HMRC calls these recharges, and VAT must be charged on them whether or not you paid VAT on the original cost.

VAT Notice 700 paragraph 25.1.1 makes the same point from the other side. Costs incurred by suppliers in making their own supply must be included in the value of that supply when VAT is calculated. Describing them as disbursements in a fee note is common practice in some professions, but in many cases they do not qualify for VAT purposes.

What are the eight conditions for a VAT disbursement?

Paragraph 25.1.1 of Notice 700, repeated in HMRC’s VAT Taxable Person manual at VTAXPER39000, lists conditions that must all be satisfied:

you acted as the agent of your client when you paid the third party
your client actually received and used the goods or services provided by the third party
your client was responsible for paying the third party
your client authorised you to make the payment on their behalf
your client knew that the goods or services would be provided by a third party
your outlay is separately itemised when you invoice your client
you recover only the exact amount you paid to the third party
the goods or services you paid for are clearly additional to the supplies you make to the client on your own account

The notice says the second condition usually prevents an agent’s own travel and subsistence, phone bills, postage and other costs being treated as disbursements. Fees paid on behalf of the client where the liability is the client’s (the notice gives Stamp Duty payable by the client on a contract as an example) are typical genuine disbursements.

Why do most recharges carry VAT?

Because most costs passed on are inputs to your own work. Notice 700 paragraph 25.1.3 and HMRC’s disbursements guidance give examples that are commonly misclassified:

Cost passed on	Treatment	Reason
Bank fee for a telegraphic or electronic transfer to or from a solicitor’s account	Recharge	The bank supplies the solicitor; the fee is part of the legal services, even though the bank’s charge is exempt
Fee for a personal search of official records to inform advice	Recharge	The solicitor receives access to the record and uses the information to advise
Fee for a postal search where the document is passed to the client	Can be a disbursement	The solicitor merely obtains a document the client needs for its own purposes
Air fare for a consultant to travel to a client’s job	Recharge	The airline supplies the consultant
Restaurant staff overtime at a private function	Recharge	Staff supply the restaurant, not the customer
Royalty or licence fees passed on by a manufacturer	Recharge	They are costs of making the manufacturer’s own supply

The consequence is that a recharge takes the VAT treatment of your main supply. A cost that bore no VAT when you bought it, such as an exempt bank charge, becomes standard rated when recharged as part of a standard rated service. The upside is that, as the HMRC guidance confirms, you can reclaim the VAT on recharged costs that were supplied to you, provided you hold a valid VAT invoice, and a VAT registered customer can reclaim the VAT you charge them.

How should the invoice look?

HMRC’s guidance gives a worked example. A website consultant agrees fees of £2,500 for design work, £300 travel costs, and £150 for a hosting package bought on the client’s behalf. The travel is the consultant’s own cost, so it is a recharge; the hosting package meets all eight conditions, so it is a disbursement.

Line	Amount
Design services	£2,500
Travelling expenses	£300
Amount on which VAT is due	£2,800
VAT at 20%	£560
Disbursements	£150
Total	£3,510

Disbursements must be itemised separately from the taxable value on the VAT invoice. Paragraph 25.1.2 of Notice 700 gives a similar layout.

When is disbursement treatment actually worth it?

Notice 700 and HMRC’s guidance both say it is generally only an advantage where the third party charged no VAT, or where your client cannot reclaim VAT. If the third party charged VAT and you treat the payment as a disbursement, you cannot reclaim that VAT because the supply was not made to you. Your client may not be able to reclaim it either if it does not hold a valid VAT invoice addressed to it.

So for a fully taxable VAT registered client, recharging a standard rated cost with VAT is usually neutral. The real money is at stake when:

the client is not VAT registered, or is partly exempt, so VAT on a recharge is a real cost to it
the third party charges no VAT, for example statutory fees, so disbursement treatment keeps the item outside VAT altogether

Those are exactly the situations HMRC targets. VTAXPER38500 warns officers that agents may disguise as disbursements costs they used in making their own supply, particularly where the principal cannot fully recover VAT.

Are there special rules for particular trades?

Notice 700 sets out several:

MOT test fees (paragraph 25.4). An unapproved garage that arranges a test as its customer’s agent, with the customer’s knowledge, may treat the test centre’s fee as a disbursement if all the conditions are met. Anything charged above the test centre’s fee is taxable consideration for the garage’s own service.
Search agencies (paragraph 25.5). A Companies House search fee passed on without analysis or comment can be a disbursement. If the agency analyses or reports on the information, the fee is part of its standard rated service.
Debt collectors (paragraph 25.6). Court fees paid to solicitors on behalf of a creditor may be treated as disbursements; for solicitors’ VAT charged to the collector there are two set options.

What records do I need?

Paragraph 25.1.2 requires evidence, such as an order form or copy invoice, showing you were entitled to exclude the payment from your own supply, and evidence that you did not reclaim input tax on it. For recharges, HMRC’s guidance says you need a valid VAT invoice or receipt for each cost on which you reclaim VAT.

What goes wrong in practice?

Adding a handling charge to a disbursement. Recovering more than the exact amount fails condition seven; the excess is taxable.
Passing on your own travel, subsistence and postage without VAT. For income tax treatment of the same costs see travel expenses for the self employed; for VAT they are recharges.
Reclaiming input tax and also treating the cost as a disbursement. You cannot do both.
No agency. If the client never authorised you to pay on its behalf, there is no disbursement. The wider agency rules are in acting as agent or principal for VAT.

Where past invoices have treated recharges as outside the scope, the underdeclared VAT must be corrected under the rules in correcting VAT errors. Disbursements are a standard test area in a HMRC VAT compliance check, particularly for professional firms.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.