Disbursement or Expense?

What is the VAT treatment on recharged expenses?

There is little logic in VAT legislation, and so the system is set out here for your information. Whether we like it or not, we have to follow the rules!

If you are VAT registered, then you charge VAT to your clients, on top of the cost of your product or services.

If in the course of doing that you incur expenses and you want to recharge those expenses, then you have to charge VAT on top of the expenses as well. The rate is the same rate that you would use for charging VAT on fees (and that can vary). The absurdity of this “VAT on recharged expenses rule” means that (for example) the cost of a train ticket which is normally exempt from VAT, becomes a VATable item the moment you recharge it to a client. The same applies to a postage stamp, or a carton of milk, normally these are non-VAT items, but they become VATable items the moment you recharge them to a client.

Any expense which you “modify” or “process” or “consume” before you recharge it to your client falls into this VAT trap. The only time you can avoid charging VAT on an expense is when it falls into the narrow definition of a “disbursement”.

That’s for things that undergo “no change” as part of your service, but which you pass on intact to your client, or on behalf of your client. In the case a solicitor handling a house purchase, the stamp duty is a disbursement and not an expense. It is not “modified, processed or consumed” as part of the service which the solicitor has provided.

Likewise, if I recharge the costs of providing my clients with tea, coffee and milk, then I need to add VAT to the bill (even though food is not normally subject to VAT). Whereas if I bought a carton of milk for you and handed it over, unused and unopened, then it would be classed as a disbursement.

Crazy, but true. As a general rule add VAT on top of all the expenses that you recharge to your clients!

Please also bear in mind that if you want money from your customer then it is always done on invoice. The expression “expense claim” is something that employers and employees use. On a business to business level you do not claim, you invoice. A full run down of “Invoicing and Sales” is set out at step 2 on this page.