How to Add Expenses to an Invoice: Disbursements vs Recharges Explained

Most freelancers and consultants eventually pay something on a client's behalf -- train tickets to a client site, domain registration, stock photography, a specialist courier. The question is how to put those costs on the invoice correctly. Get it wrong and you may overcharge VAT (and irritate a client who cannot reclaim it) or undercharge VAT (and owe HMRC money you never collected). In the UK, HMRC makes a sharp distinction between two categories: disbursements and recharges.

The core distinction: disbursements vs recharges

A disbursement is a cost you pay on behalf of your client as their agent. The key legal reality is that the client is the actual buyer -- you just handled the payment. Because the client is the true recipient of the supply, no VAT is due when you pass the cost on. You are not supplying anything extra; you are returning money that was always the client's.

A recharge is a cost that your business incurred while delivering your service. You bought something to help you do your job -- your own travel, your own tools, your own internet connection. When you pass that cost to the client, you are charging for part of your service, and VAT applies to the whole amount, even if you did not pay any VAT on the original purchase.

HMRC sets out the distinction on its VAT: costs or disbursements passed to customers page. The guidance makes clear that your own travelling expenses and postage costs are recharges -- not disbursements -- because you incurred them in supplying your service to the client.

When does a cost count as a disbursement?

HMRC uses a checklist of conditions. To treat a cost as a disbursement (and therefore not charge VAT on it when invoicing), all of the following should be true:

• You paid for the goods or services as the customer's agent, not for your own use.
• The customer authorised you to make the payment on their behalf.
• The customer received the goods or services (not you).
• The cost is clearly shown separately on your invoice -- not folded into your fee.
• You pass on the exact cost you paid, with no mark-up.
• The original VAT invoice was addressed to the customer (not to you).

A classic example: a website designer in Edinburgh is hired by a client in London. As part of the project the designer books the client's own hosting package, with the invoice from the hosting company made out to the client. The designer pays upfront and recharges the exact amount. That is a disbursement -- no VAT on the recharge. But the designer's own train ticket to a planning meeting in London is a recharge: the designer needed to travel to do the job, so it is part of the supply of design services and VAT applies.

How to show expenses on a UK VAT invoice

For a recharge (your own expenses passed to the client), add it as a separate line on the invoice with VAT applied at the standard rate. For example:

• Line 1: Copywriting services -- 3,000 words @ GBP 0.10/word -- GBP 300.00
• Line 2: Travel (London return, standard class) -- GBP 78.50
• VAT @ 20% on total GBP 378.50 -- GBP 75.70
• Total: GBP 454.20

For a disbursement (the client's own cost that you paid on their behalf), show it as a separate line at the net amount with a note that it is a disbursement and that no VAT is charged. Attach the original receipt or invoice from the supplier so the client can see exactly what was paid.

For non-VAT-registered UK freelancers

If you are below the UK VAT registration threshold (GBP 90,000 in taxable turnover), you do not charge VAT on anything -- services or expenses. The disbursement vs recharge distinction still affects how you show the costs on the invoice (separate line, exact amount, with receipt) but there is no VAT calculation to worry about. Good record-keeping matters for your own income tax, though: recharges are income, and the costs you incur to generate that income may be deductible.

Expenses on invoices outside the UK

In the United States, there is no national VAT or GST, so the disbursement vs recharge distinction does not apply in the same way. The practical rule for US freelancers is: add any client-approved expenses as separate itemised lines on the invoice, with receipts attached, at the exact cost you paid. Whether those expenses count as income for you (if you mark them up) versus a pure pass-through (if you do not) affects your taxes but not the invoice itself.

In Australia, the GST rules for passing on costs to clients are similar in spirit to HMRC's: if you are acting as agent for the client and passing on an exact cost, you may be able to treat it as a disbursement. If you incurred the cost yourself in making the supply, it is part of your taxable supply and GST applies. When in doubt, check the ATO's GST guidance or ask your BAS agent.