Recharging costs to customers


Jonathan Corsie

Jonathan Corsie

Tax Assistant Manager


We are often asked by clients whether VAT should be applied to costs recharged to customers, and, if it should, what rate of VAT should be applied.

Disbursement or recharge – what is the difference?

In the VAT world, a disbursement has a defined meaning and is a payment made by a business on behalf of a third party for a supply received by the third party.  

However, certain professions, such as solicitors for example, will use the term disbursement more widely when recharging costs incidental to their main supply of legal services.  Their sales invoices may include a separate disbursement section including costs for travelling expenses and registration fees for example.  Only some of these costs are likely to qualify as disbursements for VAT purposes.

Why is the difference important?

A VAT disbursement is outside the scope of VAT, meaning that apply VAT should not be applied to such recharges.

Most other recharges of costs do need to be recharged with VAT at the standard rate (20%).  This is often regardless of the rate of VAT charged on the initial supply. 

For example, travel expenses (rail and air fares) incurred by a business consultant will be zero rated expenditure when purchased by the consultant.  When recharging these travel costs, the consultant cannot apply the same zero rating to these costs as their business is not itself making a supply of rail or air travel to their customer.  Instead, the consultant is recharging incidental costs relating to their main supply of consultancy services.  The standard rate of VAT should be applied to both parts of the consultant’s invoice.            

In the event of a VAT compliance visit, His Majesty’s Revenue & Customs (HMRC) is likely to check whether VAT has been accounted for correctly on any disbursements and recharges.  If VAT has not been charged where it should have been, HMRC may assess for VAT due on these recharged costs and may also levy penalties and interest.

What type of recharge qualifies as a disbursement?

So, it is important to understand what can be treated as a disbursement for VAT purposes.

To treat a payment as a disbursement all the following must 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 in addition to the cost of your own services

When to consider treating a recharge cost as a disbursement

It is usually only beneficial to treat a payment as a disbursement if the supplier did not charge VAT on it, or if your customer cannot reclaim the VAT.

Treating a recharge as a disbursement is not mandatory even if all the conditions are met.

So, a policy of charging VAT at the standard rate on all recharges to customers may be suitable for most businesses and also simplify the VAT treatment concerned.

How can we help your business?

Our team of experienced VAT advisers at Johnston Carmichael can provide advice relevant to your recharge issues and any other VAT queries that are keeping you awake at night.

We can provide you with the information required to make informed decisions, to help you reach the preferred VAT outcomes for your business.


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