VAT and recharging expenses/disbursements – Avoiding common errors

Businesses often incur costs they pass on to customers, such as travel, postage, and meal expenses. A frequent question we hear is whether VAT should be charged on these, especially for items like train travel and postage, which may not include VAT when purchased. The answer is… it depends.

In this guide, we’ll help you understand when to charge VAT and when not to, as a VAT-registered business passing on expenses.

Recharge or Disbursement?

The key to deciding if VAT applies is determining whether the cost is a recharge or a disbursement. This distinction is crucial from a VAT standpoint. Recharges are typically subject to VAT, while disbursements are not. Mixing these up can be a costly mistake for your business.

What is a Recharge?

A recharge is a cost your business incurs when supplying goods or services, which you then pass on to the customer. Examples include train fares, postage, or mileage. These are expenses you’ve incurred as part of your work for the client.

For instance, if you travel by train to visit a client, you might add the train fare to their invoice, and VAT must be charged on this. Even if you paid £50 with no VAT, you’d need to invoice the client £50 + £10 VAT if you’re VAT registered.

The VAT rate applied to the recharge depends on your main supply. If your supply is standard rated, you must charge VAT on the recharge. If it’s zero-rated or exempt, the recharge follows the same VAT treatment.

What is a Disbursement?

A disbursement occurs when you pay a supplier on behalf of your customer. HMRC defines it as a payment for goods or services that are used by your client, not your business. To treat an expense as a disbursement, several criteria must be met, including acting as the client’s agent and showing the cost separately on your invoice.

If all criteria apply, no VAT is charged to the client because disbursements are outside the scope of VAT. An example is paying a website hosting fee on behalf of a client. You cannot claim VAT on a disbursement, but your customer may, provided they have the original supplier’s invoice.

VAT Registration Threshold Impact

It’s important to note that disbursements do not count towards your VAT taxable turnover. However, recharges do. This distinction is crucial, especially for businesses near the VAT registration threshold (currently £90,000). Failing to account for recharges could result in missing the point at which you need to register for VAT.