VAT disbursement or recharge: who received the supply?
A consultant invoices a client for £1,000 of advice, a £100 flight and a £200 third-party cost paid on the client's behalf. All three lines are itemised at cost, but they do not all receive the same VAT treatment. A cost stays outside your VAT calculation only when it meets all eight of HMRC's disbursement conditions. If it fails any one of them, it does not qualify as a disbursement.
The eight conditions
Start with who received the supply, then test the specific cost against HMRC's full list. Exact cost and a separate invoice line are only two of the eight conditions, so meeting those two proves little on its own. All of these must apply:
- You acted as your customer's agent when paying the third party.
- Your customer received, used or benefited from the goods or services.
- Your customer was responsible for paying for them.
- Your customer authorised you to make the payment.
- Your customer knew the supply came from a third party.
- The cost appears separately on your invoice.
- You pass on the exact amount you paid.
- The supply is additional to your own service.
Sources and context, checked :
Why your own costs stay in the calculation
HMRC treats your own business travel, postage and bank transfer charges as recharges, even when you itemise them or the original supplier charged no VAT. These are costs of delivering your service, so they form part of what you supply. The recharge then follows the VAT liability of that supply, which means it is not automatically standard-rated.
A qualifying disbursement has its own consequences. You leave it out of your VAT calculation and cannot reclaim any VAT on it. Your customer needs a valid VAT invoice to recover any VAT the supplier charged. HMRC says the advantage usually arises where the third party charged no VAT or the customer cannot recover it, so disbursement treatment is not always a saving.
A hypothetical invoice
Assume a VAT-registered consultant supplies wholly standard-rated UK consultancy for £1,000 net. They recharge £100 for their own air travel, which carried no VAT when bought. A further £200 is a customer cost that meets all eight conditions.
The consultant's own taxable supply is £1,100, so output VAT is £220. Adding the £200 disbursement gives an invoice total of £1,520. The airline's VAT treatment does not carry through to the recharge. Treating the flight as a disbursement would understate output VAT by £20.
| Invoice line | Amount | Output VAT at 20% |
|---|---|---|
| Consultancy fee | £1,000 | £200 |
| Own air travel, recharged | £100 | £20 |
| Qualifying disbursement | £200 | None |
| Subtotal before VAT | £1,300 | £220 |
Build the evidence before choosing the VAT code
The decision is much easier to support if the invoice preparer has the evidence before the invoice goes out. HMRC expects you to keep orders, invoices and other evidence supporting the exclusion, plus evidence that you did not reclaim VAT on the customer's supply. Normal input tax conditions still apply to your own recharged costs.
- Record who contracted for the third-party supply, who received it and who owed payment.
- Keep the customer's agency or payment authorisation on file before selecting a VAT code.
- Check all eight conditions and show the cost on its own invoice line.
- Block input VAT recovery on the purchase once the cost is treated as a disbursement.
- If any evidence is missing, do not process the cost as a disbursement until the file shows all eight conditions are met.
Sources and context, checked :