Can I charge VAT on disbursements to clients?

This guide explains when you can and cannot charge VAT on disbursements, how HMRC defines true disbursements, how to invoice correctly and how VAT applies to recharged expenses.

VAT on disbursements is one of the most misunderstood areas of UK invoicing. I often hear business owners say they are unsure whether to charge VAT on costs they pass on to clients, and in my opinion this confusion is justified because the rules are not simple. Whether you can charge VAT depends on whether the cost is a true disbursement or a recharged expense, and the difference between the two is far more important than most people realise.

A mistake in this area can lead to underclaimed VAT, overcharged VAT, HMRC assessments or messy disputes with clients. This guide explains exactly when VAT must be charged on passed on costs, when it must not be charged, how to identify true disbursements, how to invoice them correctly and the common mistakes businesses make. By the end you will understand exactly how VAT works on disbursements so you can bill clients correctly and avoid HMRC issues.

First: what is a disbursement for VAT purposes?

A disbursement is a cost you pay on behalf of your client, where the client is the actual buyer of the goods or services. You simply pay the supplier to save your client time or because you are required to under your contract.

The key point is that you are not receiving the supply. You are only acting as an agent.

HMRC’s definition includes eight strict conditions:

A cost is a disbursement if:

  1. You acted as the agent for your client

  2. Your client actually received the goods or services

  3. Your client knew the goods or services were being purchased

  4. Your client authorised you to make the payment

  5. Your client was liable for the cost

  6. The client would have paid the supplier if you had not done so

  7. The amount you recharge is exactly the amount you paid

  8. You show the cost separately on your invoice

If all conditions are met, the cost is a true disbursement and you do not charge VAT.

In my opinion most confusion comes from costs being treated as disbursements even when they fail several of these conditions.

When you do not charge VAT on a disbursement

If a cost meets all eight criteria above, you must not charge VAT on it. You simply pass the cost to your client at the exact amount you paid.

Examples of true disbursements:

  • A solicitor paying a Land Registry fee on behalf of a client

  • A letting agent paying tenancy deposit registration fees

  • An accountant paying Companies House confirmation statement fees

  • A surveyor paying a local authority search fee

  • A travel agent paying a visa application fee directly to the embassy

  • A construction consultant paying a planning application fee to the council

In each example the client is the true recipient of the service, not the business passing on the charge.

Important

If the supplier charged VAT to you, but it is a true disbursement, you cannot reclaim that VAT because the supply is not to you.

When you must charge VAT on a cost you pass to clients

If the cost is not a true disbursement, it becomes a recharged expense, which is part of your taxable supply to the client. That means VAT must be applied at the same rate as your main service.

These costs are not disbursements even if you paid them specifically for a client.

You must charge VAT when:

  • You purchased the goods or services for your own business

  • The supply was to you, not the client

  • You use the cost to deliver your service

  • You add any markup

  • You recharge the cost as part of your service

  • The cost is necessary for you, not your client

Typical examples of recharged expenses subject to VAT:

  • Travel expenses (train, fuel, mileage)

  • Courier services

  • Hotel stays while working for a client

  • Software or subscriptions used to complete work

  • Photocopying, printing and stationery

  • Admin fees, transaction costs and service charges

  • Subcontractor work that forms part of your supply

  • Equipment hire used by you while working for the client

All of these must have VAT charged on the recharge even if the original supplier did not charge VAT.

In my opinion this is the area where most businesses go wrong. They treat expenses as disbursements simply because they are passed on, but HMRC sees them as part of your taxable service.

Key question: Who received the supply — you or your client?

This is the simplest way to decide:

If you received the supply, you charge VAT.

If your client received the supply, you do not charge VAT.

Example

You buy software to produce a report for your client.

You received the supply → VAT applies on the recharge.

Another example

You pay a local authority fee for a planning application on behalf of your client.

Your client received the supply → No VAT on the recharge.

In my opinion following this logic avoids 90 percent of VAT errors on recharges.

How to invoice clients for disbursements correctly

A true disbursement must:

  • Be shown on a separate line

  • Not be included in fees subject to VAT

  • Be passed through at exact cost

  • Be listed as “no VAT” or “outside scope of VAT”

  • Include supplier details if needed

  • Be supported by evidence

Example invoice layout:

Service fee (standard rate VAT)
Disbursement: Land Registry fee (no VAT, paid on behalf of client)

A recharge must appear as part of the VAT-able service:

Service fee
Travel expenses
Courier cost
Subtotal
VAT
Total

In my opinion using clear invoice formats prevents disputes with clients and issues with HMRC.

How VAT works when the original supplier did not charge VAT

This is another area of confusion.

If the cost is a recharged expense

You must charge VAT even if:

  • The supplier was not VAT registered

  • The cost was zero rated

  • The cost had no VAT in the first place

Example:

You travel by train and the train ticket has no VAT.
You recharge travel costs to a client.
You must still charge VAT because you are providing a service to your client.

If the cost is a true disbursement

You do not charge VAT regardless of whether the supplier charged VAT.

Example:

You pay a government search fee for your client.
The government does not charge VAT.
You do not charge VAT because it is a disbursement.

How VAT works when you pay a cost that includes VAT

If it is a true disbursement

You pass on the total including VAT but you cannot reclaim the VAT.

If it is a recharged expense

You reclaim the VAT from the supplier invoice as your input tax and then charge VAT on the full recharge.

In my opinion this produces a clear difference in tax treatment and is one of the easiest ways to spot whether something is a disbursement or not.

Common real world examples and how they are treated

1. Accountant filing Companies House fees

Companies House fee → disbursement → no VAT
Your service → VAT applies
You pass the fee at exact cost with no VAT.

2. Solicitor paying court fees

Court fees → disbursement
Legal service → VAT
No VAT charged on the court fee.

3. Letting agent paying EPC costs

EPC belongs to landlord → landlord is the recipient
Letting agent pays → disbursement
No VAT on EPC fee
VAT on agent’s service only.

4. Contractor buying materials for a job

Materials are used to complete your service → not a disbursement
VAT must be charged on materials
You may reclaim input VAT from suppliers.

5. Architect paying planning application fees

Planning fee is the client’s cost → disbursement
No VAT on the fee.

6. Marketing agency buying stock photos

Stock photography is used to deliver your service → not a disbursement
VAT applies on the recharge.

7. Train travel for client visit

Travel is part of your service → not a disbursement
VAT applies on the recharge regardless of whether the ticket had VAT.

8. Overseas payments

If the client is the recipient → disbursement
If you are the recipient → recharge with VAT
Place of supply rules may also apply.

Common mistakes businesses make

Mistake 1: Treating all passed on costs as disbursements

Most are recharged expenses and subject to VAT.

Mistake 2: Not applying VAT on travel

Travel costs are almost always recharges, not disbursements.

Mistake 3: Adding a markup to a disbursement

If you add a markup, the entire amount becomes part of your VAT-able service. It is no longer a disbursement.

Mistake 4: Thinking disbursements reduce your VAT bill

They do not reduce VAT unless the cost is truly outside the scope.

Mistake 5: Paying costs without client authorisation

If the client did not authorise the payment, it is not a disbursement.

Mistake 6: Not keeping evidence

You must keep proof of the transaction being made on the client’s behalf.

In my opinion VAT errors on disbursements are one of the main reasons HMRC challenges invoices during VAT inspections.

How HMRC checks whether a disbursement is valid

HMRC may request:

  • Contracts

  • Emails showing client authorisation

  • Supplier invoices

  • Evidence your client received the supply

  • Breakdown of invoice lines

  • Proof you did not benefit from the supply

If HMRC concludes the cost is not a disbursement, they can:

  • Charge VAT on the full amount

  • Add penalties

  • Add interest

  • Require corrected invoices

In my opinion this is why you should be cautious before treating anything as a disbursement.

In my opinion: the simplest way to avoid VAT problems on disbursements

Ask yourself these two questions:

1. Could my client have paid the supplier directly?

If no, it is not a disbursement.

2. Did my client receive the supply, not me?

If no, it is not a disbursement.

If the answer to both is yes, it is usually a valid disbursement.

Real world examples of how businesses get this right

Example A: Accountant

Accurate separation of Companies House fees and VAT-able service fees prevents client disputes and keeps the VAT return accurate.

Example B: Solicitor

Court fees treated as disbursements reduce VAT risk. Documented authorisation protects against HMRC challenges.

Example C: Consultant

Train travel charged as a recharge reduces confusion and keeps VAT compliant.

Example D: Architect

Planning fees treated as disbursements since the council is supplying a service to the property owner.

Final thoughts

You can charge VAT on disbursements only when the cost is not a true disbursement. If the client is the recipient of the supply and you merely paid the cost on their behalf, no VAT should be charged. Most passed on costs are not disbursements but recharged expenses, and VAT must be applied at the same rate as your service. The key is understanding the eight HMRC criteria and invoicing correctly.

In my opinion treating a cost as a disbursement without meeting every HMRC condition is risky. It is far safer to assume VAT applies unless you can clearly show the client was the true recipient of the supply.