Costs passed on to clients - disbursements - and VAT

When you supply goods or services to your customers, you might also pay certain costs that you pass on when you invoice them. If your business is VAT-registered then you'll need to know how to deal with these items correctly for VAT.

If you make a payment on behalf of your customer, for goods or services received and used by your customer, you might be able to treat these payments as 'disbursements' for VAT purposes. If so, you don't charge VAT when you pass payments like these on to your customer, but you can't claim back any VAT on their cost either.

This guide explains when you should charge VAT on the costs and expenses you pass on to your customers, and when you can treat payments like these as disbursements for VAT and leave them out from the VAT calculation on your invoice.

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Disbursements - costs you can exclude from the VAT calculation

If you sometimes pay suppliers on behalf of your customers, and you pass on the cost to your customers when you invoice them, then you might be able to leave out these payments from the VAT calculation. In this situation it's the customer, not you, who buys and receives the goods or services - you're acting as their agent. This type of payment is known as a 'disbursement' for VAT purposes.

Before you treat a payment as a disbursement for VAT purposes, you'll need to make sure all of the following apply:

  • you paid the supplier on your customer's behalf and acted as the agent of your customer
  • your customer received, used or had the benefit of the goods or services you paid for on their behalf
  • it was your customer's responsibility to pay for the goods or services, not yours
  • you had permission from your customer to make the payment
  • your customer knew that the goods or services were from another supplier, not from you
  • you show the costs separately on your invoice
  • you pass on the exact amount of each cost to your customer when you invoice them
  • the goods and services you paid for are additional to whatever you're billing your customer for doing yourself

It's usually only an advantage to treat a payment as a disbursement for VAT purposes if the supplier didn't charge VAT on it, or if your customer can't reclaim the VAT.

Examples of disbursements

Some examples of costs that are usually excluded from the VAT calculation as disbursements include:

  • a solicitor paying Stamp Duty on a client's behalf
  • a funeral director paying for flowers on behalf of a client

Find out more about treating postal costs as disbursements for VAT

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What isn't a disbursement for VAT purposes

There are many incidental costs that your business might incur that you can't exclude from the VAT calculation when you invoice your customers. These could include travelling expenses and your own postage costs. They aren't treated as disbursements for VAT purposes.

Any costs that your business incurs itself in the course of supplying goods or services to customers are not disbursements for VAT purposes. It's you, and not your customer, who purchases the goods or services, which are supplied to and used by your business.

It's up to you whether or not you itemise costs like these on your invoices. If you do show them separately when you invoice your customers then they're known as 'recharges', and not disbursements, for VAT. You'll have to charge VAT on them whether you paid any VAT or not.

Some examples of costs that could be recharges but are not disbursements include:

  • An airline ticket that you buy to visit a client or to travel to a job. If you recharge the cost to your client you must charge VAT because the flight was for you, not for the client.
  • Postage costs you incur when you send letters to your customers. These are normal business costs and you must add VAT if you recharge them.
  • A bank transfer fee you might incur when transferring money from your business account to a client's own account. Even though the bank's fee is exempt from VAT, if you recharge the fee you must charge VAT. This is because it was for a service provided to your business and not to your customer.

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Showing disbursements and recharges on your invoices

If you exclude disbursements from the VAT calculation then you must itemise them separately on your invoices. You might also decide to itemise any incidental costs you recharge to your customers, but that's up to you.

An example of an invoice showing disbursements and recharges

A website design consultant based in London does a week's work for a client in Edinburgh. The consultant visits the client's premises at the start of the week to discuss the project. The consultant also agrees to purchase a website hosting package from an Internet service provider on behalf of the client.

The basic fee agreed between the consultant and their client for the work is £2,500 plus VAT. It's also agreed that the client will pay the cost of the consultant's travelling expenses, which come to £300. The cost of the website hosting package purchased on the client's behalf is £150.

The £300 travel cost that the consultant recharges to the client is not a disbursement. The consultant must charge VAT on it. But the cost of the website hosting package is a disbursement and can be excluded from the VAT calculation, because:

  • it was purchased for the use of the client
  • the client agreed that the consultant would arrange and pay for it on their behalf - this means the consultant agreed to act as the client's agent
  • the consultant passed the whole £150 charge on to the client, without adding anything, as a separate item on the invoice
  • it was the client's responsibility to pay for the goods
  • the consultant had permission from his client to make the payment
  • the client knew the web hosting package was from another supplier and not from the consultant
  • the consultant showed the costs separately in the invoice
  • the web hosting package paid for by the consultant is additional to the other services being billed to the client

The consultant's invoice to their client for this work might include the following items:

  • design services - £2,500
  • travelling expenses - £300
  • amount on which VAT is due - £2,800
  • VAT at 20 per cent - £560
  • disbursements - £150
  • total including VAT - £3510

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When you can and when you can't claim back VAT

When you can claim VAT

If you had to charge VAT on items you paid for because they were supplied to you and not to your client, you can claim back any VAT you paid on them. It makes no difference whether or not you passed these costs on to your customers as recharges. You'll need a VAT invoice for each item you claim the VAT back on.

Your customer will also be able to claim back the VAT you charged them if they're VAT-registered.

When you can't claim VAT

If you paid a VAT-registered supplier for goods or services on a customer's behalf, there may have been VAT on what they charged.

You can't claim this VAT back if the goods or services were supplied to your customer and not to your business, and you treated this as a disbursement for VAT purposes when you invoiced your customer and did not charge VAT.

Your customer may also be unable to claim back the VAT if they don't have a valid VAT invoice for the goods or services.

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What records you need to keep for VAT

If you pass on any disbursements to your customers and therefore don't charge VAT on them, you must keep evidence to show that you were entitled to leave the items out of the VAT calculation when you invoiced your customers. Examples of the types of evidence that would show this include order forms and copy invoices.

You must also be able to show that you haven't claimed back the VAT on items you paid for on your customers' behalf.

Recharges

To claim back the VAT on costs and expenses you pass on to your customers as recharges, you'll need a valid VAT invoice or receipt for each.

Read about VAT invoices and what they must show

Contact HMRC about VAT

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More useful links

Read more about disbursements in Notice 700 The VAT Guide

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