How to treat VAT on recharged expenses: Disbursements, VAT and more

Hasib Howlader | 6th May 2025

When providing services to your client, occasionally you might need to pay for items on their behalf. How do you then treat the VAT on the expenses that you recharge to the customer?

There is one simple rule that you need to keep in mind: all recharged expenses carry VAT, unless the item is a disbursement.

Paragraph 25.1.1 of HMRC VAT Notice 700 below specifies the process.

The information provided in this article is for general guidance and informational purposes only. It does not constitute legal advice or tax advice, nor should it be relied upon as such. While every effort has been made to ensure the accuracy of the contents, we accept no responsibility for any loss or damage that may arise from reliance on the information contained herein. Individual circumstances can vary and the VAT treatment of expenses may differ in each case. Seek specific advice from a qualified professional before taking any action or making any decisions relating to VAT, disbursements, or related legal and tax matters.

Key takeaways: Disbursements, VAT & Recharged Expenses

VAT Notice 700 states you can treat a payment to a third party as a disbursement for VAT purposes if:

You acted as the agent of your client when you paid the third party

Your client actually received and used the goods or services provided by the third party

Your client was responsible for paying the third party and authorised you to make the payment on their behalf

Your client knew that the goods or services you paid for would be provided by a third party

Your outlay will be separately itemised when you invoice your client

You recover only the exact amount which you paid to the third party

The goods or services are clearly additional to the supplies which you make to your client on your own account

Is there VAT on disbursements?

If you pay an expense on behalf of your customer and that is purely an expense of the customer then you consider this as being a disbursement.

For example, an accountant may pay the Companies House fee for filing the confirmation statement for one of its clients, but that fee belongs to the client.

It is the client/company who gets the benefit of the fee payment, and who ‘uses’ what is paid for by the fee. As it is only the client that uses it, it is a disbursement, so no VAT can be charged.

However, if the accountant sends some documents to his client for signature by courier, this fee belongs to the accountant.

It is an expense they have incurred as part of their work and chosen to recharge – as part of their work done and because it is related to the client. If such a cost is recharged to the client, it must carry VAT.

An important thing to keep in mind is that recharged expenses and disbursements need to be clearly labelled and distinguished on the VAT invoice.

VAT treatment on recharged expenses

When considering VAT on disbursements, you must determine whether the expense is for your own services or genuinely acts as a payment made on behalf of your client.

If you charge VAT incorrectly, you risk applying the wrong VAT treatment and this could result in an incorrect tax liability properly incurred for VAT purposes. Only charge VAT where you provide a service directly to your client, or where costs incurred are part of your legal services.

Let us take the example of a search fee during a property transaction. If you pay the exact sum paid to the third party for an electronic property search and you subsequently recharge this cost to your customer, and you list the costs separately on your invoice, you can treat this as a disbursement and there is no need to charge VAT on this fee for VAT purposes.

However, if you mark up the fee or add any value yourself, it may fall under your own services, and then you must charge VAT.

Can you reclaim VAT? Disbursements and VAT

Many legal services providers commonly handle disbursements VAT carefully and ensure the VAT treatment is accurate to avoid common pitfalls.

For instance, when you process stamp duty land tax as part of conveyancing, you should only pass on only the exact amount paid to HMRC and you must not charge VAT on these statutory fees.
You should also provide your client with a valid VAT invoice, clearly showing which items have VAT on disbursements and which relate to standard rated legal services.
If your client wishes to reclaim VAT, they can only do so for amounts invoiced for VAT purposes and not for items you treated as disbursements.

Be mindful that any deviation from charging only the exact sum for a disbursement may mean the gross amount is no longer considered a disbursement for VAT purposes and instead is treated as part of your own services.

Knowing when to charge VAT

When issuing sales invoices to your clients, you must ensure that all relevant goods or services you supply carry the correct rate of VAT, unless you are specifically dealing with a disbursement.

If you recharge travel costs to your client as part of the services you have provided, you must make clear whether such costs relate to goods or services for your client or for the business incurs as part of its own operations.
If the costs payable fall under the category of goods or services actually supplied to your client, adding VAT is required on your sales invoices for VAT purposes.
Suppose the business pays registration fees to a professional body on the client’s behalf.
If the client authorised this payment and the client knew these costs were being incurred specifically for their benefit, then these are likely to be disbursements and you should not be adding VAT.
On the other hand, if your firm covers such costs as part of the total goods or services you provide and then recharges the client, those costs need to have VAT added.
Remember, input VAT can only be reclaimed on qualifying business purchases, which includes costs incurred as part of your taxable activities but not on disbursements where the client’s responsibility is to incur and recover the VAT.
When you deal with such costs, make sure your documentation clearly separates those for which the client is solely responsible from those for which your firm has taken responsibility.
You should explain to the client that only certain costs payable qualify for VAT recovery, and that not all goods or services which the business incurs can be treated in the same way for VAT purposes.

Adding VAT where applicable, and distinguishing between input VAT and disbursements VAT, ensures that your VAT reporting remains accurate and avoids common pitfalls.

Final thoughts: Disbursement for VAT purposes

If you are ever uncertain about the correct approach, especially relating to the VAT treatment of complex transactions or mixed invoices including search fee items and other legal or consultancy services, it is crucial to review guidance regularly or seek advice from a VAT specialist.

For other guides, take a look at our blog. Some of our most popular articles include:

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