Rechargeable Costs
If you’re VAT-registered and your customer agrees to pay for your expense costs (for example travel, food, mileage) there is a common mistake that businesses make when invoicing their customers.
Rechargeable Costs Example
You need to bill a client for your time plus travelling/food expenses.
Your hourly rate is £100/hour and you have worked for 8 hours.
You caught a train for £50 (there is no VAT on train tickets) to the customer’s premises.
You bought lunch for £12 (£2 VAT) whilst visiting the customer.
The customer has agreed to pay for your hourly rate plus expenses.
Common Mistake 1 - Not Charging VAT To Whole Invoice
Many people will invoice their clients and not include VAT on the expense that has no VAT on it:
Consultancy = £800 Net + £160 VAT = £960 Gross
Train Ticket = £50 Net + £0 VAT = £50 Gross
Lunch = £10 Net + £2 VAT = £12 Gross
Total = £860 Net + £162 VAT = £1,022 Gross
Common Mistake 2 - Adding VAT Twice
Many people will invoice their clients and effectively add VAT twice:
Consultancy = £800 Net + £160 VAT = £960 Gross
Train Ticket = £50 Net + £10 VAT = £60 Gross
Lunch = £12 Net + £2.20 VAT = £14.40 Gross
Total = £862 Net + £172.40 VAT = £1,034.40 Gross
The lunch has effectively had VAT added twice. The correct way is to add the Net value to the sales invoice and the VAT is added to that.
Correct Way To Invoice
This is however incorrect as VAT should be added to the whole invoice:
Consultancy = £800 Net + £160 VAT = £960 Gross
Train Ticket = £50 Net + £10 VAT = £60 Gross
Lunch = £10 Net + £2 VAT = £12 Gross
Total = £860 Net + £172 VAT = £1,032 Gross
Disbursements vs Rechargeable Costs
Rechargeable costs are expenses you incur in connection with your business services (such as travel, meals, mileage, postage, certain sundries) which you then recharge to your client. Since they are part of the overall service you provide, you treat them as part of your supply of services to the client and charge VAT on the whole amount unless a specific exemption applies.
Disbursements (which are quite rare in practice), on the other hand, are payments you make on behalf of your client for goods or services that your client would otherwise pay for directly, and they are used exclusively by the client. In such cases, provided certain conditions are met (for example acting strictly as agent, payment must be separately identifiable, the amount must be what you paid out and you do not mark-up the cost), you may treat them as disbursements for VAT purposes — meaning you do not charge VAT on the amount you pass on. The client effectively reimburses you the exact cost.
In short:
Rechargeable cost = you incurred it as part of your service → you recharge + VAT.
Disbursement = you paid something purely on behalf of your client → you pass it on at cost without VAT.
Disbursement Example
Imagine you are acting as a website developer for your client. Your client asks you to purchase a domain name and hosting package from a third-party provider, and you pay the provider on behalf of your client.
The hosting is for your client’s use alone, you have no further involvement except making the purchase, and you recharge the exact amount you paid. That payment can qualify as a disbursement and you would invoice the client for the hosting cost at your exact out-of-pocket amount without adding VAT.
Common Mistake 3 – Treating Expenses as Disbursements
Some businesses wrongly treat their travel, meals, or other out-of-pocket costs as disbursements to avoid charging VAT. However, these costs are not disbursements because:
They are incurred while carrying out the business’s own work;
The client does not directly use or benefit from the travel or meals; and
The business chooses to incur these costs as part of delivering its service.
Therefore, travel and meal expenses are rechargeable costs, forming part of the overall service provided to the client, and VAT must be applied when they are invoiced.