Can I charge VAT on disbursements to clients?

As a chartered accountant running my own firm, I am asked about disbursements and VAT constantly. In my experience, disbursements sit right at the point where technical VAT rules collide with everyday invoicing, and that is exactly why so many businesses get them wrong. I regularly see VAT charged when it should not be, VAT not charged when it should be, and invoices labelled as disbursements that do not meet the VAT definition at all.

In this article, I want to explain clearly and practically whether you can charge VAT on disbursements to clients, how HMRC define a true disbursement, how disbursements differ from recharges, and what this means for your invoices and VAT returns. I will also cover common examples such as professional fees, travel costs, Companies House fees, court fees, and third party services.

I am writing this in the first person because this is exactly how I explain it to clients in real life. By the end, you should be able to identify a genuine disbursement, understand when VAT should or should not be charged, and avoid one of the most common VAT mistakes I see.

What a disbursement actually is for VAT purposes

The first thing to understand is that HMRC have a very specific definition of a disbursement. In everyday language, businesses often use the word disbursement to mean any cost they pass on to a client. For VAT purposes, that is not correct.

A true VAT disbursement is a cost that you incur on behalf of your client, as their agent, where the supply is actually made to the client and not to you.

In simple terms, you are paying something for the client, not paying for something you need in order to do your work.

If that distinction is not clear, VAT problems usually follow.

HMRC’s conditions for a true disbursement

For a cost to be treated as a genuine disbursement for VAT purposes, HMRC expect all of the following conditions to be met.

• You paid the supplier on behalf of your client

• The goods or services were supplied to your client, not to you

• Your client was responsible for paying the supplier

• You acted purely as the client’s agent

• Your client knew you would pay the supplier on their behalf

• Your client authorised the payment

• The cost was separately itemised on your invoice

• You charged the client exactly what you paid, with no mark up

• The cost was clearly described as a disbursement

If any one of these conditions is not met, HMRC are likely to say it is not a disbursement.

Why disbursements matter for VAT

The VAT treatment of disbursements is different from normal income.

If a cost is a genuine disbursement:

• It is not part of your taxable turnover

• You do not charge VAT on it

• You do not reclaim VAT on it

• You simply pass on the exact cost to the client

If a cost is not a genuine disbursement, it is usually treated as part of your own supply, and VAT must be charged at the same rate as your main service.

This is where many businesses fall into error.

Disbursements versus recharges explained clearly

Most costs that businesses pass on to clients are not disbursements. They are recharges.

A recharge is a cost you incur as part of providing your service, which you then recover from the client.

For VAT purposes:

• Disbursements sit outside the scope of VAT

• Recharges follow the VAT treatment of your main service

Calling something a disbursement on an invoice does not make it one.

Common examples of genuine disbursements

True disbursements are actually quite limited.

Common examples include:

• Court fees paid on behalf of a client

• Land Registry fees paid for a client

• Companies House filing fees paid on behalf of a client

• Stamp duty paid for a client

• Search fees where the search is in the client’s name

In these cases, the service is supplied to the client, and you are simply facilitating payment.

VAT treatment of genuine disbursements

Where a cost is a genuine disbursement:

• You do not charge VAT on it

• The VAT treatment follows whatever applies to the original supply

• If the original supply had VAT, the client deals with it directly

• If the original supply had no VAT, there is still no VAT

You do not add VAT just because you are VAT registered.

Companies House fees and VAT

Companies House fees are one of the most common examples of genuine disbursements.

Companies House does not charge VAT on filing fees.

If you pay a Companies House fee on behalf of a client and recharge it exactly, with no mark up, it is usually a genuine disbursement.

You should not charge VAT on it.

This applies to fees such as:

• Company incorporation

• Confirmation statements

• Change of name filings

Problems arise when these fees are bundled into fixed price packages without being separately itemised.

Court fees and legal disbursements

Court fees are another classic example of genuine disbursements.

Court fees are paid by the client, even if the solicitor pays them initially.

As long as the conditions are met and the fee is passed on at cost, no VAT should be charged.

This is well established in HMRC guidance and case law.

Travel costs and why they are usually not disbursements

This is one of the biggest problem areas.

Travel costs such as:

• Mileage

• Train tickets

• Flights

• Hotels

• Parking

are almost never genuine disbursements.

This is because the travel is undertaken by you in order to provide your service. The supply of travel is to you, not to your client.

For VAT purposes, these costs are usually recharges.

If your main service is standard rated, you must charge VAT on the recharged travel cost, even if there was no VAT on the original expense.

Can you charge VAT on recharged travel costs

Yes, in most cases.

If you recharge travel costs as part of your service:

• They form part of your taxable supply

• VAT is charged at the same rate as your main service

This applies even where the original cost was zero rated or outside the scope, such as flights or MOTs.

This point causes a lot of confusion and is a frequent HMRC challenge area.

Professional fees paid to third parties

Professional fees are usually not disbursements.

Examples include:

• Surveyors

• Consultants

• Engineers

• Subcontractors

• Specialists

If you engage a third party to help deliver your service, the supply is to you, not to your client, even if the client benefits.

Recharging these costs is part of your own supply, and VAT must usually be charged.

Subcontractors and VAT on recharges

Subcontractor costs are a common trap.

Even if a subcontractor invoices you separately and even if the client agrees to pay the cost, it is usually not a disbursement.

It is a cost of providing your service.

When you recharge it, VAT follows your own VAT treatment.

Disbursements in fixed fee arrangements

Fixed fee arrangements often blur the lines.

If you charge a fixed fee that includes third party costs, HMRC are very likely to say those costs form part of your taxable supply.

To preserve disbursement treatment:

• Costs must be separately identified

• Costs must be charged at exact cost

• Agency must be clear

Bundling costs into one fee usually destroys disbursement treatment.

How to show disbursements on an invoice

If you have a genuine disbursement, your invoice should clearly show it.

Best practice includes:

• Listing the disbursement separately

• Describing it clearly

• Showing the exact amount paid

• Not adding VAT

• Not marking it up

This clarity helps if HMRC ever review the invoice.

Common disbursement VAT mistakes I see

In practice, the same errors come up repeatedly.

These include:

• Treating travel costs as disbursements

• Charging VAT incorrectly on genuine disbursements

• Failing to charge VAT on recharges

• Bundling disbursements into fixed fees

• Using the term disbursement incorrectly

• Assuming no VAT on the original cost means no VAT on the recharge

These mistakes often go unnoticed until an HMRC inspection.

What HMRC look for during inspections

When HMRC review disbursements, they often focus on:

• Invoices labelled as disbursements

• Travel and accommodation costs

• Subcontractor charges

• Fixed fee pricing structures

• Evidence of agency relationships

If the paperwork does not support disbursement treatment, HMRC will usually reclassify the amounts as taxable income and assess VAT accordingly.

Disbursements and different VAT rates

Another important point is that disbursements do not take on your VAT rate.

They take on the VAT treatment of the original supply.

Recharges always take on your VAT rate.

This distinction is critical when dealing with zero rated or exempt costs.

Disbursements and VAT registration thresholds

Genuine disbursements are not part of your taxable turnover.

This means they do not count towards the VAT registration threshold.

Recharges do count.

Misclassifying recharges as disbursements can therefore affect whether you should have been VAT registered earlier.

When I advise getting specific advice

In my professional opinion, advice is essential where:

• You regularly pass on third party costs

• You operate in legal, property, or professional services

• You use fixed fee pricing

• You deal with mixed VAT rates

• You have had no previous VAT review

Disbursements are a high risk VAT area precisely because they feel simple when they are not.

Final thoughts from real world experience

So, can you charge VAT on disbursements to clients. The honest answer is sometimes, but only if they are not true disbursements.

True disbursements sit outside the scope of VAT and should not have VAT charged. Most costs passed on to clients are not true disbursements. They are recharges and must follow the VAT treatment of your main service.

The biggest mistake I see is businesses using the word disbursement loosely. HMRC do not care what you call it. They care about who the supply was made to and why the cost was incurred.

If you understand that principle and apply it consistently, you will avoid one of the most expensive and stressful VAT mistakes a business can make.