What Is a Disbursement?
Disbursement

Many businesses pay for things on their customers' behalf: a solicitor paying a court fee, an accountant paying a filing fee, a designer buying a font licence in the client's name. When those costs are passed on, the question is whether they are part of your own supply, and so carry VAT like the rest of your invoice, or something the customer bought through you as their agent. HMRC calls the second kind a disbursement, and it sits outside your VAT.

HMRC's conditions

GOV.UK sets out that a payment can be treated as a disbursement only if all of these apply:

A £1,000 invoice with a £120 disbursement, VAT at 20%

• Your fee£1,000.00
• VAT on your fee£200.00
• Disbursement, no VAT£120.00
• Invoice total£1,320.00

What is not a disbursement: recharges

The commonest mistake is treating your own costs as disbursements. HMRC is clear that incidental costs your business incurs itself, such as travel and your own postage and delivery, must be included in your VAT calculations when you invoice. If you show them separately, they are recharges, and you must charge VAT on them whether or not you paid VAT on them. HMRC's examples:

• An airline ticket you buy to visit a client or travel to a job is for you, not the client, so a recharge must carry VAT.
• Postage when you send letters to customers is a normal business cost, so VAT is added if you recharge it.
• A bank transfer fee paid when moving money from your account to a client's account is exempt when you pay it, but if you recharge it you must charge VAT, because it was a service to your business.

When treating a cost as a disbursement helps

HMRC notes it is usually only an advantage to treat a payment as a disbursement if the supplier did not charge VAT on it, or if your customer cannot reclaim VAT. For example, a fee that carries no VAT, passed to a customer who is not VAT registered, would otherwise pick up 20% VAT as a recharge. Where the cost carries VAT and your customer can reclaim VAT, there is little difference either way.

Showing disbursements on an invoice

If you leave disbursements out of your VAT calculations, you must itemise them separately on your VAT invoices. List your own services with VAT, then a separate section for disbursements, each at the exact cost, with no VAT added. Keep the supplier's receipt, addressed to the customer where possible, as evidence the cost was theirs.

Disbursements and recharges compared

Disbursements for businesses that are not VAT registered

If you are not VAT registered, the VAT question does not arise: you charge no VAT on anything. The distinction still matters for your own tax, though. A true disbursement is not your income or your expense: the money passes through you. A recharge is your income, and the cost behind it your expense. Showing disbursements separately on the invoice, and keeping the receipts, keeps your income figures accurate.

Disbursements in freelance and creative work

Freelancers often buy things for clients: stock images, fonts, domain names, printing, hosting. Some of those are the client's own purchases, licensed or registered in the client's name, which can be disbursements if every condition is met. Others, such as a stock image licence in your name that you use to create the client's work, are part of your own supply and belong in your price. Decide at the start, agree it with the client, and invoice accordingly. The guide on how to invoice as a freelancer covers expenses more broadly.

A worked example

An accountant, VAT registered, prepares accounts for a client for £1,000 plus VAT. With the client's permission, she also pays a £120 filing fee to a public body on the client's behalf, for a filing that is the client's legal responsibility. She also drove 40 miles to the client's premises and wants to recover the mileage. Her invoice shows: accounts preparation £1,000, mileage recharge £18, VAT at 20% on both, £203.60; then, under a separate heading, disbursement: filing fee paid on your behalf, £120, no VAT. The total is £1,341.60. The mileage is her own travel, so it is a recharge with VAT; the filing fee is the client's cost, so it is a disbursement without.

Common mistakes

• Treating your own travel as a disbursement. It is a recharge and carries VAT.
• Adding a mark-up to a disbursement. The exact cost must be passed on; a marked-up cost is part of your supply.
• Bundling disbursements into your fee. They must be itemised separately.
• Reclaiming VAT on a disbursement. You cannot; the cost was your customer's.
• Paying without the customer's permission. Permission is one of the conditions.

Which trades use disbursements most

Disbursements are most common in professions that routinely deal with third parties for their clients. Solicitors pay court fees, search fees and registration fees on their clients' behalf. Accountants pay filing fees. Architects and surveyors may pay planning application fees in the client's name. Estate and letting agents may pay certain charges for landlords. Funeral directors pay crematorium and burial fees for families. In each case, the professional is paying for something the client needs and is responsible for, as the client's agent, alongside their own professional service.

For most sole traders outside those professions, true disbursements are rarer than they seem. A plumber who buys a boiler to fit is supplying the boiler as part of the job; a photographer who hires a studio is buying something for their own work. Both are part of the main supply, and on a VAT-registered business's invoice, both carry VAT.

How to decide in practice

Ask three questions. Who is the customer of the third party: is the receipt or contract in your customer's name, or yours? Who received the benefit: your customer directly, or you in doing your job? Would your customer have had to pay this anyway, whoever they used? If the answers are "my customer", "my customer" and "yes", and you pass on the exact cost with their permission, you are probably looking at a disbursement. If any answer points to you, it is a recharge. When in doubt, treat it as a recharge and charge VAT; that is the safer error, and your VAT-registered customers can reclaim it anyway.

Keeping the evidence

Keep the supplier's invoice or receipt for every disbursement, ideally in the customer's name, and a note of the customer's permission to pay it. If HMRC checks your VAT, those documents show why the cost was left out of your VAT calculations.

Disbursements and getting paid

Because a disbursement is money you have already paid out on your customer's behalf, a late payment hurts twice: you are waiting for your fee and for money you have spent. Invoice disbursements promptly, ideally on the same invoice as the work they relate to, with the receipts attached. For large disbursements, many professionals ask for the money up front, before paying the third party. If a business customer pays late, the whole invoice, including disbursements, is covered by the usual late payment rules; see how to chase an unpaid invoice.

Related terms

For recovering disbursements that are paid late, see charging interest on late payments. For the full list of details on any invoice, including disbursement lines, see how to write an invoice, and for keeping the receipts, how long to keep invoices.

A disbursement appears on a VAT invoice as a separate item without VAT. For whether VAT belongs on your invoices at all, see do I charge VAT on my invoice; for the full list of invoice details, see what a UK invoice must include. The VAT calculator works out the VAT on the parts of your invoice that carry it.

In short: a disbursement is your customer's cost that you paid for them and pass on exactly, outside your VAT; everything else you pass on is part of your own price.

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