VAT on Disbursements and Recharges

Many businesses re-charge expenses to customers. Recharges are subject to VAT at the standard rate. The VAT charged is an additional cost to the customer if they are either not VAT registered or not receiving the goods/services provided for business purposes.

On the other hand, disbursements are charges passed on to customers, to which VAT does not have to be added. Disbursements are outside the scope of VAT.

To get the VAT treatment correct, it is essential to identify which charges passed on to customers can be treated as disbursements.

VAT on Disbursements

VAT does not have to be charged on goods/services which meet all the following criteria:

• The customer has received, used or benefited from the goods or services they are being charged for.
• It is the customer’s responsibility to pay for the goods or services.
• The customer has permitted the payment to be made on their behalf.
• The customer knows that the goods or services are from another supplier.
• The costs are itemised separately on the invoice.
• The exact amount of each cost is shown on the invoice.
• The goods and services are in addition to the cost of any other services provided.

VAT cannot be reclaimed on expenditure which qualifies as a disbursement and on which VAT has not been charged to the customer.

VAT on Recharges

Costs incurred by the business when supplying goods or services to customers are not disbursements for VAT. It’s the business buying the goods or services for its business use.

Examples of recharges include hotel bills, travelling expenses and postage costs. It is the business which has incurred and paid for these costs.

Recharges do not have to be shown separately on invoices.

Recharges are subject to VAT even if the original expenditure was zero-rated or exempt from VAT. For example:

• Train fares are zero-rated, but a recharge of the train fare is subject to VAT.

• Bank transfer fees paid when transferring money from the business account to a customer’s account are exempt from VAT, but a fee recharge is subject to VAT.

An invoice to a customer could include charges for the provision of goods and services, recharges and disbursements.

VAT on costs incurred by the business and recharged to the customer can be reclaimed as input tax on the business’ VAT return.

Contact our dedicated VAT team for assistance if you are having any difficulties with VAT on disbursements and/or recharges.