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.

Practical Example

Scenario:

• You pay £100 to a gas engineer for a safety test on behalf of a client.
• You charge the client £100 as a disbursement and £20 as your service fee.

We’ll use this example below for you to follow along.

Identify the Purpose

To ensure correct VAT treatment and reporting, you need a nominal code to record disbursements separately from your turnover. This can be done by creating a new nominal code in the appropriate category:

1. Disbursements Recoverable (for amounts paid on behalf of the client).
2. Disbursement Fees (for your service fee, which is part of your turnover).

Step 1: Set Up New Nominal Codes

• Log in to QuickFile and navigate to Reports > Chart of Accounts.
• Click Create New Account.
• Enter the following details for each code:

Set Up New Nominal Codes For Disbursements Recoverable

• Account Name: Disbursements Recoverable.
• Category: Assets and Liabilities
• Code: 1105 (you can use another code if needed, but keep it in the same category)

To enable your newly created nominal code to be used in sales invoices within QuickFile, follow these steps:

• Locate the Nominal Code:

  1. Go to Reports > Chart of Accounts.

  2. Scroll or use the search bar to find the nominal code you created (1105: Disbursements Recoverable).

  3. Once located, click the options button next to the code.
     

  4. In the dropdown menu, select Settings.

  5. Check the option that says Allow this code to be used on sales invoices

  

  4. Save your changes.

  5. Save each new nominal account.

• Set Up New Nominal Codes For Disbursement Fees

• Account Name: Disbursement Fees.
• Category: Sales
• Code: 4010 (as above, if this code is already taken, you can use a similar code in the same range)

Step 2: Record the Disbursement (Non-Turnover)

Add a Purchase Invoice for the Gas Man

• Go to Purchases > Enter New Purchase.
• Supplier: Enter the gas engineer’s details.
• Under category select the new nominal code that you created above Disbursements Recoverable [Asset]
• Description: “Gas fire safety test on behalf of [Landlord’s Name]”.
• Amount: £100 (no VAT if applicable).

If you’re VAT registered

If you’re VAT registered, you will also need to do the following -

• Select Additional VAT options to flag the invoice as Outside of Scope for UK VAT

Tag the Payment to the Gas Man

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

Step 3: Create a Sales Invoice for the Client

Raise an Invoice for the Landlord (your client)

You will need to raise 2 invoices for the landlord due to the VAT treatment -

Invoice 1: The Disbursement

• Go to Sales > ** Create New Invoice**

• Enter the following line item:

  • Enter the Disbursement: “Gas fire safety test” – £100. If applicable, you can mark the VAT as 0% as we’ll handle this below.
  • Select the additional line setting and under category select the new nominal code Disbursements Recoverable [Asset], as shown below:
    
    

• If you’re VAT registered, select Additional VAT Options to flag the invoice as Outside of Scope for UK VAT
  

  

Invoice 2: Agency Fee

• Go to Sales >> Create New Invoice
• Enter the Agency Fee: “Arrangement fee and access provision” – £20 (include VAT if applicable, e.g., £20 + £4 VAT for 20% VAT).
• Select the additional line setting and under category select the new nominal code Disbursements fees, as shown below:

Tag the Payment from the client:

When the landlord pays the invoice, tag the payment in your bank account to this sales invoice.

Step 4: Reporting

Turnover:

The £20 fee (plus VAT if applicable) will appear as part of your turnover in reports such as Profit & Loss:

The £100 disbursement will not appear as income but can be tracked under the Disbursements nominal account:

VAT (if applicable):

VAT is only charged on your fee (£20 in this case) and not on the disbursement.

Or if you’re on the Flat Rate scheme:

Additional Tip

Project Tracking:

• By tagging both the expense and invoice to the client’s project in QuickFile, you can see:
  • The disbursement as a cost.
  • The exact amount passed to the client as income (with no VAT impact).

For more guidance on using QuickFile Projects, visit: 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.

What’s a recharge and how does it differ to 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.

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.

Practical Example - Disbursement

• The gas engineer invoices £100 + £20 VAT directly to you.
• You pay £120 to the gas engineer.
• You invoice your client:
  • £100 as a VAT-exempt disbursement.
  • £20 + VAT (£24) as your fee.

Result:

• You cannot reclaim the £20 VAT on the gas engineer’s invoice, as it’s a disbursement.

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.

Practical Example - Not a Disbursement

• The gas engineer invoices £100 + £20 VAT to you.
• You pay £120 to the gas engineer.
• You invoice your client:
  • £100 + £20 VAT (£120) for the gas test.
  • £20 + VAT (£24) for your fee.

Result:

• You can reclaim the £20 VAT on the gas engineer’s invoice, as it’s part of your business costs.
• Your invoice to the client includes VAT on the entire amount (£144).

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.
• VAT on rebilled expenses if they are part of your service.