A disbursement is a payment you make to a supplier on your client’s behalf, acting as their agent, and then pass on to the client at the exact cost. Disbursements on behalf of clients are generally recorded on the balance sheet, not the profit and loss account (P&L), as they are not considered part of your business’s income or expenses. Only your own fee for arranging the service counts as turnover.

This guide shows how to set up two nominal codes, record the supplier’s invoice, invoice your client and check that only your fee reaches your turnover and VAT return.

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Before you start

• Check the payment really is a disbursement: all eight conditions under What is a disbursement? in the FAQs below must be met. If the cost was part of your own service, it’s a recharge and VAT applies.
• If you’re VAT registered, you’ll also flag the supplier’s invoice and the disbursement invoice as Out of Scope for UK VAT. These extra steps are marked If you’re VAT registered.
• QuickFile doesn’t decide whether a cost is a disbursement. Make sure your transactions meet the conditions and follow HMRC’s guidance on disbursements.

What example does this guide use?

We’ll use this example below for you to follow along. You need two nominal codes so the disbursement is kept separate from your turnover:

• Disbursements Recoverable: for amounts paid on behalf of the client (an asset code, so it stays on the balance sheet).
• Disbursement Fees: for your service fee, which is part of your turnover (a sales code).

Step 1: Create the two nominal codes

Create the Disbursements Recoverable code

1. Go to Reports > Chart of accounts, then click Create New Account.

   

2. Choose Enter specific code.

3. Enter Code 1105, Account Name Disbursements Recoverable and, if you like, Notes (for example Disbursements Control Account). The form shows This will be created in the Assets and Liabilities category. You can use another free code, but keep it in the Assets and Liabilities range.

4. Click Save. QuickFile shows Your new Nominal Account has been created!

Create the Disbursement Fees code

1. Click Create New Account again and choose Enter specific code.

2. Enter a free code between 4000 and 4099, for example 4012, with Account Name Disbursement Fees. The form shows This will be created in the Sales category.

   

3. Click Save.

Step 2: Allow Disbursements Recoverable on sales invoices

New asset codes can be used on purchases straight away, but not on sales invoices. Turn this on for 1105 so you can invoice the disbursement to your client.

1. In Reports > Chart of accounts, click the Assets and Liabilities (0001 - 2999) heading to expand it. It’s collapsed when the page opens.

2. On the 1105 Disbursements Recoverable row, click the Options (cog) button and choose Settings.

   

3. Tick Allow this code to be used in sales invoices. Allow this code to be used in purchase invoices is already ticked.

   

4. Click Save. QuickFile shows Nominal account 1105 has been updated!

Step 3: Record the supplier’s invoice

1. Go to Purchases > Enter new purchase.

2. Choose the supplier (the gas engineer) in Supplier Name, or click New to add them.

3. In Category, start typing Disburse and choose Disbursements Recoverable [Asset].

   

4. Enter a Description, for example Gas safety test at 12 Example Road on behalf of the landlord, and the amount (£100).

5. If you’re VAT registered: click Edit next to Additional VAT Options and tick Out of Scope for UK VAT.

   

6. Click Save Details.

Pay the supplier

When you pay the gas engineer, tag the payment in your bank account to this purchase invoice. See Tagging your bank transactions.

Step 4: Invoice your client (two invoices)

You will need to raise 2 invoices for the landlord due to the VAT treatment. Out of Scope for UK VAT applies to the whole invoice, so the disbursement and your fee can’t share one invoice: otherwise either your fee loses its VAT or the disbursement is included in your VAT return.

Invoice 1: the disbursement

1. Go to Sales > Create new invoice and choose the client.

2. Enter the line, for example Gas safety test at 12 Example Road (disbursement), £100.

3. Click the cog next to the line’s description (Additional line settings) and, under Category, choose Disbursements Recoverable [Asset].

   

4. If you’re VAT registered: click Edit next to Additional VAT Options and tick Out of Scope for UK VAT. The line’s VAT changes to 0% and the VAT total is removed, so you don’t need to change the VAT rate yourself.

   

5. Click Save Details.

Invoice 2: your fee

1. Go to Sales > Create new invoice again for the same client.

2. Enter your fee, for example Arrangement fee and access £20. If you’re VAT registered, keep the VAT rate (20% gives £20 + £4 VAT = £24).

3. Click the cog (Additional line settings) and, under Category, choose Disbursement Fees.

   

4. Click Save Details and send both invoices as usual.

Record the client’s payment

When the landlord pays, tag the payment in your bank account to the matching sales invoice (or invoices).

Step 5: Check your reports

Turnover

The £20 fee appears as part of your turnover in reports such as Reports > Profit and loss. The £100 disbursement doesn’t.

The Disbursements Recoverable account

The £100 disbursement doesn’t appear as income, but you can track it in the Disbursements Recoverable account. In Reports > Chart of accounts, choose Options > View details on the 1105 row: the supplier’s invoice is a debit and the client’s invoice a credit, so the balance returns to zero once both are recorded.

VAT (if applicable)

VAT is only charged on your fee (£20 in this example), not on the disbursement. On the standard VAT scheme, your VAT return includes the £4 VAT in Box 1 and the £20 fee in Box 6; the £100 disbursement isn’t included.

If you’re on the Flat Rate Scheme, only the VAT-inclusive fee (£24) counts towards your flat rate turnover in Box 6. The disbursement isn’t listed, and the supplier’s invoice isn’t in Box 7.

How can I track disbursements for each client?

Add the same Project Tags to the supplier’s invoice and both sales invoices, for example 12-example-road. QuickFile suggests an existing tag as you type, and a new one is saved in lower case with hyphens instead of spaces.

In Reports > Projects you can then see, for each tag, the disbursement as a cost (Purchases) and the amounts invoiced and received from the client (Sales and Received).

For more guidance, see Projects in QuickFile.

VAT Treatment

According to HM Revenue & Customs (HMRC), correctly distinguishing between disbursements and recharges is essential for proper VAT treatment.

Please see the FAQ below if you’re unsure of the difference.

Frequently Asked Questions

What is a disbursement?

A disbursement occurs when you pay a supplier on behalf of your customer, acting as their agent.

For a payment to be treated as a disbursement (and thus outside the scope of VAT), all the following conditions must be met:

• Agency Role: You acted as the agent of your customer when making the payment.
• Customer Benefit: Your customer received, used, or benefited from the goods or services you paid for on their behalf.
• Customer Responsibility: It was your customer’s responsibility to pay for the goods or services, not yours.
• Customer Authorisation: You had permission from your customer to make the payment.
• Supplier Transparency: Your customer knew that the goods or services were from another supplier, not from you.
• Separate Invoicing: You show the costs separately on your invoice.
• Exact Amount: You pass on the exact amount of each cost to your customer when you invoice them.
• Additional to Own Services: The goods and services you paid for are in addition to the cost of your own services.

If all these conditions are satisfied, the payment is considered a disbursement, and you do not charge VAT when passing these costs to your customer. See VAT: costs or disbursements passed to customers on GOV.UK.

What’s a recharge and how does it differ from a disbursement?

Recharges are costs incurred by your business when supplying goods or services to customers. These costs are not disbursements and must be included in your VAT calculations.

Examples include:

• Travel Expenses: If you purchase an airline ticket to visit a client or travel to a job, and recharge the cost to your client, you must charge VAT because the flight was for you, not for the client.
• Postage Costs: Postage costs incurred when sending letters to customers are normal business costs, and you must add VAT if you recharge them.
• Bank Transfer Fees: Even though a bank’s fee is exempt from VAT, if you recharge the fee, you must charge VAT, because it was for a service provided to your business and not to your customer.

These costs are considered part of your taxable supply, and you must charge VAT on them, regardless of whether you paid any VAT on the original expenses. To recharge costs in QuickFile, see Rebilling Expenses.

What records need to be kept? How should I be invoicing for disbursements?

When invoicing, it’s crucial to distinguish between disbursements and recharges:

• Disbursements: Itemise them separately on your invoice and do not charge VAT on these amounts.
• Recharges: Include them in your VAT calculations and charge VAT according to the rate applicable to your main supply.

Maintaining accurate records and correctly classifying expenses will help ensure compliance with VAT regulations.

Can I claim VAT on disbursements?

No, you cannot reclaim VAT on disbursements:

• Since the cost is not incurred as part of your own business activities but on behalf of your client, you cannot reclaim VAT.
• The client may be able to reclaim VAT if they are VAT-registered and the original supplier’s invoice is made out to them.

Can I claim VAT on non-disbursement expenses?

If you pay for a cost that is not a disbursement (i.e., it is part of your business activity), then yes, you can reclaim VAT:

• For example, with the above example, if the gas test was your responsibility and part of your service delivery, you could reclaim the VAT on the supplier’s invoice.
• In this case, you would charge VAT on the full amount (your service fee + rebilled cost) when invoicing the client.

How can I ensure compliance?

1. Clearly distinguish between disbursements and business expenses in your records.
2. Provide your client with copies of the original supplier invoices for disbursements (if needed).
3. Use proper VAT treatment in your sales invoices: no VAT on disbursements, and VAT on rebilled expenses if they are part of your service.

Troubleshooting

I can’t find 1105 in the Chart of Accounts

Click the Assets and Liabilities (0001 - 2999) heading to expand it. The section is collapsed when the page opens.

Disbursements Recoverable isn’t in the Category list on my sales invoice

Open the code’s Settings and tick Allow this code to be used in sales invoices (Step 2).

The form says “This code is already in use.”

Another nominal account already uses that number. Choose the next free code in the same range, for example 4012 instead of 4010.

The disbursement is showing in my turnover or in Box 6 of my VAT return

Check the disbursement is on its own invoice with Out of Scope for UK VAT ticked and the line’s category set to Disbursements Recoverable [Asset]. Out of Scope applies to the whole invoice, so keep your fee on a separate invoice.

Related topics

New to bookkeeping in QuickFile? Start with Sole Trader Bookkeeping - The Basics or Limited Company Bookkeeping - The Basics for an overview of recording income, expenses and money in and out of the business.

• Sole Trader Bookkeeping - The Basics: The essentials of sole trader bookkeeping, including which category to use for common costs.
• Limited Company Bookkeeping - The Basics: The essentials for limited companies, from the directors’ loan account to out-of-pocket expenses.
• Rebilling Expenses: Recharge costs that are part of your own service, with VAT, using Rebill to client.
• Projects in QuickFile: Tag purchases and invoices to a project and see costs and income per client or job.
• VAT Options Explained: What Out of Scope for UK VAT, VAT Exempt and the other invoice VAT options mean.
• Tagging your bank transactions: Match the supplier payment and the client’s receipt in your bank account to the invoices.
• Bookkeeping for Letting Agents: Record rent collected for landlords and the net amounts you pay over, less your fees.