Last updated November 6, 2026
Rules and figures from other sources checked on November 6, 2026. They change, so confirm with the source before you rely on them.
General information, not tax or legal advice. The rules depend on your country and your situation, so check anything with a tax or legal consequence with your accountant.
Most reimbursable expenses carry VAT. If you bought something to do your own job, such as travel, it is part of your supply, so you charge VAT on it at your normal rate. A true disbursement, paid as your client's agent and passed on at exact cost, stays outside your VAT. The test is who received the supply.
This guide covers the VAT. The billing side, including how to set up and word expense lines for a client, is in the guide to invoicing reimbursable expenses.
What is the difference between a recharge and a disbursement?
The difference between a recharge and a disbursement is whose purchase it was. If the third party supplied you, passing the cost on is a recharge. If the third party supplied your client and you only paid on their behalf, it can be a disbursement.
| Recharge | Disbursement | |
|---|---|---|
| Who received the goods or services | You | Your client |
| VAT on your invoice | Yes, at your normal rate | No |
| Can you reclaim VAT you were charged | Yes, with a valid VAT invoice | No |
| Can you add a markup | Yes, and VAT applies to it | No, exact cost only |
| Shown separately on the invoice | Your choice | Required |
EU law draws the same line. Article 78(b) of the VAT Directive puts incidental expenses charged to the customer, such as transport and insurance, into your taxable amount. Article 79(c) leaves out only repayments of expenditure "incurred in the name and on behalf of the customer" and entered in a suspense account, and it requires proof of the actual amount and bars you from deducting any VAT on it. National rules vary in the detail, so check yours.
When can you treat a cost as a disbursement?
You can treat a cost as a disbursement only if every condition passes, and in the UK HMRC's VAT Notice 700, section 25.1 lists eight:
- You acted as your client's agent when you paid the third party.
- Your client received and used the goods or services.
- Your client was responsible for paying the third party.
- Your client authorised you to pay on their behalf.
- Your client knew a third party would provide the goods or services.
- You show the cost separately on your invoice.
- You recover only the exact amount you paid.
- The goods or services are clearly additional to what you supply yourself.
Condition 2 knocks out most candidates, because the people who use the train, phone and postage are usually you. HMRC's guide to costs and disbursements and Notice 700 give these examples.
| Cost passed to the client | Treatment | Why |
|---|---|---|
| Air fare to visit the client | Recharge | The airline supplied you |
| Your postage to the customer | Recharge | A normal cost of your business |
| Bank transfer fee from your account | Recharge | The bank supplied you, even though its fee is exempt |
| Web hosting bought for the client, with their agreement | Disbursement | The client uses it and knew who supplied it |
| Solicitor's personal search of a land register, to advise a client | Recharge | The solicitor used the information |
| Solicitor's postal search, to obtain a document for the client | Can be a disbursement | The client uses the document |
The solicitor examples show how narrow the line gets, and legal firms meet it all the time. Calling a line "disbursement" on your invoice doesn't make it one for VAT.
A worked example: one invoice with both
Here's an invented example, using the UK's rule and its 20% rate. A consultant bills a £4,000 fee and three costs:
- Train fares of £180, on which no VAT was charged.
- A hotel at £250 plus £50 VAT, on a VAT invoice in the consultant's name.
- A £120 statutory filing fee the client owed, which the consultant paid with their permission.
| Invoice line | Amount |
|---|---|
| Consulting fee | £4,000.00 |
| Train fares (recharged) | £180.00 |
| Hotel (recharged, net of VAT) | £250.00 |
| Amount on which VAT is due | £4,430.00 |
| VAT at 20% | £886.00 |
| Disbursement: filing fee paid on your behalf | £120.00 |
| Total | £5,436.00 |
The train fares carry VAT even though the consultant paid none, because HMRC says you charge VAT on recharges "whether you paid any VAT or not". The consultant reclaims the £50 on the hotel in the usual way. The disbursement sits below the VAT line, itemised on its own, as HMRC's example invoice does.
How do you avoid charging VAT on VAT?
You avoid charging VAT on VAT by recharging the net cost when you can reclaim the VAT you paid. It's the commonest mistake here, and it comes from treating the receipt total as the cost.
| Hotel receipt: £250 + £50 VAT | Recharged at | VAT added | Client pays |
|---|---|---|---|
| Correct: recharge the net | £250.00 | £50.00 | £300.00 |
| Wrong: recharge the receipt total | £300.00 | £60.00 | £360.00 |
In the wrong version, the client overpays by £60. The consultant has also reclaimed £50, so they have made money on an expense they meant to pass on at cost.
If you can't reclaim the VAT, for example because you're not VAT-registered, the gross amount really is your cost, and the sums change. See the FAQ below.
Is it worth treating a cost as a disbursement?
Treating a cost as a disbursement is usually worth it only when the supplier charged no VAT or your client can't reclaim VAT. HMRC says so directly. A disbursement stops you reclaiming the VAT, and your client may not be able to reclaim it either without a valid VAT invoice.
| Supplier charged VAT? | Client can reclaim VAT? | Usually better as |
|---|---|---|
| No | Either | Disbursement, if the conditions are met |
| Yes | No | Disbursement, if the conditions are met |
| Yes | Yes | Recharge, so the client gets VAT it can reclaim |
Keep the evidence. Notice 700, section 25.1.2, says to hold something such as an order form or copy invoice that shows you could exclude the payment, and to be able to show you didn't reclaim the VAT. A line you can copy on the invoice:
Disbursement, paid on your behalf with your authority, at cost with no VAT added: [supplier, reference, date]. Copy of the supplier's invoice attached.
What about expenses on a cross-border invoice?
Expenses on a cross-border invoice normally follow the main service, because a recharge is part of your own supply. If your fee to a business in another EU country falls under the reverse charge, the recharge sits under it too and carries no VAT from you. It goes in the same net amount.
Foreign VAT you paid along the way is a separate matter. A hotel's VAT in another EU country doesn't go on your normal return. You claim it online through your own tax authority, and some countries refuse refunds on certain costs, such as restaurants, entertainment and fuel. So on a recharge, what you can reclaim decides what your real cost is.
Billing recharges and disbursements in ERPFlow
ERPFlow records your side of an expense and lets you bill it, but it doesn't connect the two. Expenses hold the supplier, category, VAT and an attached receipt. They aren't linked to customers or jobs, so nothing moves to an invoice by itself, and ERPFlow shows no per-customer cost or margin. It has no employee expense claims, approval workflow or mileage tracking either.
- Add each cost as an invoice line, with a clear description and the net amount.
- Recharges take your normal tax rate, which a new line already starts with.
- Disbursements take no VAT. Clear the tax rate on that line, and start its description with "Disbursement:" so it is itemised.
- Attach the receipt to the invoice as a file.
ERPFlow doesn't test whether a cost qualifies, so the eight conditions stay with you. A disbursement line counts in the invoice's subtotal and total like any other line, and there is no separate disbursements subtotal, so add one in Notes if you want it spelled out. The suspense-account treatment in Article 79(c) belongs in your bookkeeping, so tell your accountant which lines they are. The Peppol XML export treats any line with no tax as zero-rated, so ask your e-invoice operator before sending a disbursement that way.