VAT on disbursements depends on whether the payment qualifies as the client's purchase. A qualifying UK disbursement is outside the scope of VAT: you pay a third party as the client's agent, the client receives and uses the supply, and all eight HMRC conditions must be met. You add no VAT to the reimbursement.
A recharge is a cost incurred in making your own supply. It forms part of that supply's value for VAT. If you are VAT-registered and providing a standard-rated UK service, you charge 20% VAT on recharged travel, including a train fare that was zero-rated when you bought it.
Outside the scope and zero-rated are different treatments. With a qualifying disbursement, the reimbursement is excluded from the value of your own supply; it is not a supply you make at 0%. HMRC describes this distinction in its guidance on disbursements and consideration.
The examples below assume a VAT-registered business making standard-rated UK services. The original supplier's VAT rate does not, by itself, determine the treatment of an incidental recharge.
Disbursement vs recharge: whose purchase was it?
Start with the engagement and the underlying purchase. Did the client buy something from the third party, with you only handling payment, or did you buy an input needed to deliver your own work?
| Cost and arrangement | Recipient and purpose | Classification | Invoice treatment |
|---|---|---|---|
| A filing fee owed by the client, paid with its authority as its agent | The filing is the client's obligation; you handle the payment | Disbursement, if every condition is met | Exact repayment shown separately, outside your VAT calculation |
| Your train journey to a client meeting | You use the travel to carry out your engagement | Recharge | Included in the value of your service |
| A subcontractor you hire to complete work you promised to deliver | You buy the subcontractor's work to fulfil your own contract | Recharge | Included in the value of your service |
| A contractor engaged directly by the client, whose bill you pay as disclosed agent | The client receives the contractor's separately purchased service and owes the payment | Disbursement, if every condition is met | Exact repayment shown separately, outside your VAT calculation |
For example, a landlord contracts directly with a plumber for a repair. The letting agent's instruction is to settle that bill from the landlord's funds. That arrangement differs from an agent selling a repair service to the landlord and hiring the plumber to fulfil it. When processing supplier invoice recharges on letting-agent landlord statements, match the line to the underlying contract and supplier invoice before deciding its VAT treatment.
Search fees also need this distinction. A professional who obtains information and uses it to formulate advice has purchased an input to their own service. Calling the payment a Land Registry disbursement does not settle the VAT question. VAT Notice 700, section 25 explains the distinction. Legal-sector arrangements have further invoice and recovery considerations, covered in VAT recovery on counsel fees in solicitor bills.
HMRC's eight disbursement conditions
HMRC's eight conditions for recognising a disbursement must all be met. Its manual identifies whether the client, rather than the agent, uses the third-party purchase as the key practical condition. VAT Notice 700 sets out the requirements in paragraph 25.1.1:
- You act as the client's agent when paying the third party.
- The client receives and uses the third party's goods or services.
- The client owes the payment to the third party.
- The client authorises you to pay on their behalf.
- The client knows a third party supplies the goods or services.
- Your invoice identifies the payment separately.
- You recover exactly what you paid.
- The third-party supply is additional to your own supplies to the client.
Apply these to the documents together. An instruction to pay helps establish authority; the supplier's order and invoice help identify the client's purchase; the payment and repayment establish the amount. No single document answers every condition.
A receipt in the client's name cannot cure an arrangement in which you actually bought and used the service. Equally, an invoice line labelled “disbursement” and passed on at cost proves neither agency nor client use. If the purchase was an input to your own engagement, separate presentation does not remove it from your supply's VAT value.
A mixed invoice showing recharges and a disbursement
A VAT-registered business adviser charges a UK client £900 for a standard-rated engagement, plus £80 for the adviser's train fare and an agreed £40 mileage charge for a separate journey. These amounts are illustrative. The mileage charge is a price agreed with the client, not a prescribed employee mileage allowance.
The client also contracts directly with a translator for a standalone translation it needs for its own records. This is additional to the adviser's work, and the adviser does not use the translation to deliver that work. The client knows the translator is the supplier, remains responsible for the bill and authorises the adviser to pay £120 on its behalf as agent. The adviser's invoice separately requests repayment of that exact £120, without a markup.
The translator's £120 bill includes £20 VAT. That underlying VAT does not make the adviser's reimbursement a taxable recharge: the arrangement meets the disbursement conditions.
| Invoice line | Amount | Treatment on the adviser's invoice |
|---|---|---|
| Business advisory fees | £900.00 | Standard-rated |
| Train fare recharge | £80.00 | Part of the standard-rated service |
| Agreed mileage charge | £40.00 | Part of the standard-rated service |
| Taxable subtotal | £1,020.00 | Fees plus travel |
| VAT at 20% | £204.00 | £1,020 × 20% |
| Disbursements: translator invoice paid as agent | £120.00 | Outside the scope; includes the supplier's VAT |
| Total due | £1,344.00 | £1,020 + £204 + £120 |
The train fare and mileage appear above the taxable subtotal because they are costs of the adviser's own work. The translation repayment appears after the output VAT calculation under a separate disbursements heading. Do not describe it as a 0% sale by the adviser or add another £24 VAT to it.
The table shows the amount calculation; the complete invoice still needs the identification, numbering and tax details in the UK VAT invoice requirements. Ensure the client receives the translator's VAT invoice, and retain a copy with your disbursement records; the repayment line and supplier invoice serve different purposes.
Who can reclaim the VAT, and which records support it?
In the mixed invoice, the adviser pays £120 to the translator and recovers £120 from the client. The adviser does not reclaim the £20 supplier VAT. The translation was supplied to the client, so the adviser's payment is not an input-tax purchase of its own.
For the client, a £120 disbursement line is not itself evidence of £20 recoverable VAT. Recovery depends on the client's entitlement and a valid VAT invoice for the translator's supply. The client's VAT registration alone does not settle the claim. HMRC's guidance on costs passed to customers explains the agent's restriction, the client's invoice evidence and the records required.
Keep the following together for this payment:
- Client instruction: the authority to pay the translator's £120 bill as agent.
- Purchase evidence: the client's order or contract identifying the translator's standalone service.
- Supplier invoice: the translator's bill for £100 plus £20 VAT, documenting the supply to the client.
- Payment evidence: the adviser's £120 payment, matched to that supplier invoice.
- Client invoice and repayment: the separate £120 disbursement line and its settlement.
- Separate disbursement record: the amount paid and recovered, with no supplier VAT reclaimed by the adviser.
Use the translator's invoice reference in the disbursement record and client invoice description so that the £120 remains traceable. If the client settles the whole £1,344 invoice in one payment, the adviser can match the £120 element without treating it as another fee.
Recharges have a different input-VAT position. Where the purchase was supplied to the adviser's business, recovery of any purchase VAT is subject to the normal input-tax rules and supporting invoice evidence. A zero-rated train ticket carries no purchase VAT to recover, even though the travel recharge contributes to output VAT on the adviser's standard-rated service. The client assesses recovery of the adviser's £204 output VAT from the adviser's VAT invoice, separately from any claim for the translator's £20.
Travel, bank charges and markups: common VAT questions
Do you add VAT when the original travel cost had none?
Yes, where your own travel is recharged as part of a standard-rated UK service. For example, a £50 zero-rated train fare recharged as £50 before VAT produces a £60 client charge: £50 plus £10 output VAT. The absence of VAT on the ticket does not make the recharge zero-rated.
Does an exempt bank transfer fee stay exempt when recharged?
A fee for a transfer from your business account is a service supplied to your business. When passed on as an incidental cost of your standard-rated service, it falls within that service's taxable value. A £10 bank fee recharged at £10 before VAT therefore becomes £12 on the client invoice. VAT Notice 700 paragraph 25.1.3 gives the bank-fee distinction.
Can you add a markup to a disbursement?
You cannot pass a £120 payment on as a £145 disbursement: exact reimbursement is one of the conditions. If you buy something for your own service and price its recharge at £145 before VAT, that amount forms part of your supply's VAT value. For a standard-rated service, the client pays £174, including £29 VAT.
A genuine disbursement and a separate agency fee require a different arrangement. Suppose the client agrees a £25 fee for arranging payment, separately from reimbursement of its own £120 supplier bill. If the £120 meets every disbursement condition and the £25 is a separate standard-rated UK agency service, the invoice can show £120 outside the scope, £25 agency fee and £5 VAT on that fee: £150 total.
The additional fee pays for the agent's own service. It does not increase the amount described as the disbursement, and splitting a marked-up sale into two invoice lines does not establish two different supplies.