What is the difference between disbursements and recharges?

At Towerstone Accountants we provide specialist accountancy services for solicitors and law firms operating under SRA regulation. This article has been written to explain What is the difference between disbursements and recharges in clear practical terms so you understand how the rules apply in day to day practice. Our aim is to help you stay compliant protect client money and make informed financial decisions.

This is one of those topics that sounds simple on the surface but causes a huge amount of confusion in practice. I see it regularly with solicitors accountants consultants and other professional firms. Costs are labelled as disbursements when they are not or VAT is applied incorrectly to recharges because no one has properly defined what the cost actually represents.

The difference between a disbursement and a recharge is not just a technical accounting point. It affects VAT treatment client billing regulatory compliance and in some cases professional conduct. Getting it wrong can lead to underpaid VAT overcharged clients regulatory breaches or awkward conversations when errors are uncovered later.

In this article I am going to explain clearly and practically what the difference is between disbursements and recharges. I will explain how HMRC views them how VAT applies and how they should be treated in real world billing. I will also cover common examples where firms often get this wrong and explain how to avoid those mistakes.

All of this reflects how the rules are applied in practice by HMRC and aligns with guidance on GOV.UK but explained in plain English rather than VAT manual language.

Why the distinction matters

Before getting into definitions it is worth explaining why this distinction matters so much.

The difference between a disbursement and a recharge affects

• Whether VAT should be charged to the client

• Whether VAT can be reclaimed by the firm

• How costs appear on invoices

• How income is reported

• Regulatory compliance for certain professions

• Client trust and transparency

In my experience most problems arise because firms focus on what they call a cost internally rather than how it should be treated legally and for VAT.

Calling something a disbursement does not make it one.

What is a disbursement in simple terms

A disbursement is a cost that you pay to a third party on behalf of your client where the cost legally belongs to the client not to you.

In other words you are acting purely as an agent. You are advancing money temporarily and then recovering exactly the same amount from the client.

For VAT purposes HMRC applies very strict conditions to what qualifies as a true disbursement. If those conditions are not met the cost is not a disbursement even if it feels like one.

HMRC’s conditions for a true disbursement

For a cost to be treated as a true disbursement all of the following must apply.

• You paid the cost to a third party on behalf of your client

• Your client received the goods or services not your business

• Your business did not use the goods or services

• You acted as the client’s agent not as principal

• Your client was responsible for paying the third party

• The exact amount paid is recharged with no mark up

• The cost is clearly itemised on the invoice

• The third party invoice is addressed to the client where possible

If any one of these conditions is not met HMRC will usually treat the cost as part of your own supply which means it is a recharge not a disbursement.

This is the point many firms miss.

What is a recharge

A recharge is a cost that your business incurs in order to provide its own services and then passes on to the client as part of the overall charge.

In this situation the cost belongs to you first and the client second. You are not acting as agent. You are acting as principal.

For VAT purposes a recharge is treated as part of your taxable supply. VAT follows the VAT treatment of your main service regardless of how the cost is described on the invoice.

The simplest way to tell the difference

I often explain the difference like this.

If the cost exists so that you can do your job then it is usually a recharge.

If the cost exists because the client must pay it anyway and you are simply paying it on their behalf then it may be a disbursement.

This is not a perfect rule but it works surprisingly well in practice.

VAT treatment of disbursements

If a cost qualifies as a true disbursement

• You do not charge VAT on the recharge

• You do not reclaim VAT charged by the third party

• You pass on the gross amount exactly as paid

• The cost is outside the scope of VAT

This is because the supply is between the third party and the client not between you and the client.

VAT treatment of recharges

If a cost is a recharge

• VAT is charged to the client at the same rate as your service

• You may reclaim input VAT if it is recoverable

• The cost forms part of your taxable turnover

• VAT applies even if the third party did not charge VAT

This last point often causes confusion. VAT on recharges is based on your supply not on whether VAT was charged to you.

Common examples of true disbursements

Some costs are well established as disbursements when handled correctly.

Examples often include

• Court fees

• Land Registry fees

• Certain statutory filing fees

• Some conveyancing search fees

• Probate registry fees

In these cases the service is provided directly to the client and the fee is payable by them even though the firm pays it initially.

Common examples of recharges

Many costs that firms assume are disbursements are actually recharges.

Examples commonly include

• Barristers’ fees

• Expert reports obtained for your advice

• Medical reports obtained to support litigation

• AML and identity checks

• Postage and courier costs

• Printing and copying

• Travel and accommodation

• Software usage fees

These costs are incurred so that you can deliver your service. The client is not the recipient of the third party service in the eyes of HMRC.

Why barristers’ fees are usually recharges

Barristers’ fees are one of the most misunderstood areas.

Even though the work ultimately benefits the client

• You instruct the barrister

• The advice is supplied to you

• You integrate it into your work

• The barrister is not acting directly for the client

As a result the fee is part of your own supply and VAT should usually be charged when you recharge it even if the barrister is not VAT registered.

Why AML checks are always recharges

AML checks are required so that you can comply with your regulatory obligations.

They are not services supplied to the client.

For that reason

• AML costs are never true disbursements

• VAT must be charged when recharged

• Showing them separately does not change the VAT treatment

This is an area where HMRC has been very clear.

The mistake of separate line items

One of the biggest misconceptions I see is the belief that showing a cost separately makes it a disbursement.

This is not true.

VAT treatment depends on the nature of the supply not how it appears on the invoice.

A recharge remains a recharge even if

• It is shown separately

• It is labelled disbursement

• It is passed on at cost

• No profit is added

Substance always overrides presentation.

Why recharges still attract VAT even at cost

Another common misunderstanding is that VAT should only apply if there is a mark up.

This is incorrect.

If a cost is part of your supply VAT applies to the full amount recharged regardless of whether you add a margin.

VAT is a tax on supply not profit.

How invoices should present disbursements and recharges

Clarity on invoices matters for both VAT and client trust.

Best practice is

• Show true disbursements separately and clearly

• Do not include VAT on disbursements

• Include recharges within the VAT calculation

• Use clear descriptions

• Be consistent across invoices

Inconsistent presentation often attracts HMRC attention.

Regulatory implications beyond VAT

For some professions such as solicitors the distinction between disbursements and recharges also has regulatory implications.

For example

• Client money rules

• Billing transparency

• Cost disclosures

• Residual balance management

Incorrect treatment can therefore create regulatory issues as well as tax ones.

Common mistakes I see in practice

In my experience the most common errors include

• Treating all third party costs as disbursements

• Assuming no VAT applies because no VAT was charged

• Failing to review costs individually

• Copying invoice templates without understanding them

• Never reviewing historic treatment

• Mixing regulatory language with VAT treatment

These mistakes often persist for years before being identified.

What happens if treatment is wrong

Incorrect treatment can lead to

• Underpaid VAT and HMRC assessments

• Penalties and interest

• Client refunds

• Regulatory breaches

• Loss of credibility with inspectors

Fixing historic errors is usually more painful than getting it right from the outset.

How to decide the correct treatment in practice

When reviewing a cost I always ask a few simple questions.

• Who is the service actually supplied to

• Who is legally responsible for the fee

• Could the client have received the service without you

• Are you acting as agent or principal

• Is the cost essential to delivering your service

Answering these honestly usually makes the correct treatment clear.

Reviewing your current billing practices

If you are unsure whether your firm is treating costs correctly it is worth reviewing

• Your list of common disbursements

• Your VAT treatment

• Your invoice templates

• Your engagement letters

• Your historic VAT returns

A short review can prevent significant exposure.

Final thoughts

The difference between disbursements and recharges is not about labels or invoice layout. It is about who receives the supply and who is legally responsible for the cost.

True disbursements are costs you pay purely as an agent on behalf of your client. Recharges are costs you incur to deliver your own services. VAT treatment flows from that distinction and cannot be changed by wording alone.

In my experience most firms get some of this wrong not because they are careless but because the rules are misunderstood and rarely revisited. Taking the time to review and understand the difference now can save years of accumulated risk later.

You may also find our guidance on Do solicitors pay VAT on disbursements and How do solicitors handle VAT on counsel fees useful when reviewing related SRA and accounting obligations. For a broader overview of solicitor accounting and compliance topics you can visit our solicitors accounts rules hub which brings all related guidance together.