The treatment of recharged expenses is a common cause of VAT errors. A disbursement is where you act on behalf of your client in arranging and paying for goods or services, but the underlying supply remains between the supplier and your client.
An example of a disbursement is a website hosting fee paid by a web design company on behalf of its client. Here the supply is between the website hosting company and the client. Because the ‘supply’ remains between website hosting company and the client, the web design company can treat this payment as a disbursement, as long as the disbursed amount is clearly shown on an invoice separately from any other supply, and the exact cost is passed on. The web design company, therefore, does not need to account for VAT when they recharge this cost on to the client.
However, travel, hotel accommodation and meals arranged by the web design company on a visit to their client are being supplied to and consumed by the web design company, not their client. Therefore, this is not a disbursement, and the client must treat any recharge of these types of expense as further consideration for the main supply. Any VAT on the recharge would then follow the VAT treatment of the main supply.
This is important, as supplies such as rail travel, which is zero-rated when your client purchases them, will have to be recharged at the same liability as the main supply. In the client’s case, if the web design services are standard-rated then any recharge of their own expenses will follow this liability and also be standard rated.
See also our FAQ under the Value Added Tax section regarding the VAT treatment of recharged expenses.
The H M Revenue & Customs website also provides further details at https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers.