Reimbursements and disbursements: VAT on rebilled costs

IT projects rarely stop at your own time. You procure hardware, buy software licences, stand up hosting or pay for per-seat tools on a client's behalf, then pass the cost on. The question that trips up many firms is deceptively simple: do you add VAT to the amount you rebill?

The answer depends on whether the cost is a disbursement or a recharge. The two look identical on a bank statement but are treated very differently for VAT, and getting the call wrong can quietly introduce an error on every project. This guide explains the distinction in general terms, the strict conditions that separate the two, and how clean records help you make and defend the right call. The precise conditions vary by jurisdiction, so confirm your position with a qualified adviser.

Disbursement versus recharge

A recharge is a cost you incur as part of delivering your own service and then pass on to the client. Because it forms part of your supply, VAT generally applies to it in the same way as the rest of your invoice, even if the underlying cost was VAT-free. Most rebilled costs in practice are recharges.

A disbursement is narrower: it is a genuine pass-through where you pay a third party as the agent of your client, for something that was the client's responsibility to pay. A true disbursement is generally outside the scope of your VAT, so you pass on the exact amount with no VAT added, but you also cannot reclaim any VAT on the original cost. The labels matter less than the substance: a payment is only a disbursement if it actually meets the conditions, not because you would prefer it to be one.

The conditions that make it a disbursement

To treat a rebilled cost as a disbursement, all of a set of strict conditions generally have to be met. Broadly, you must have paid the supplier on your client's behalf and acted as their agent; the client must have received and used the goods or services; it must have been the client's responsibility to pay, not yours; you must have had the client's permission to pay; and the client must have known the goods or services came from another supplier, not from you. You also pass on the exact amount, with no mark-up.

A practical pointer often used is whose name is on the third-party invoice. If the supplier billed your client, the cost is more likely a disbursement; if it billed you, it is more likely a recharge that forms part of your own supply. For typical IT rebilling, hardware you buy and resell, licences you procure under your own account, hosting you provision and manage, the conditions are frequently not met, which is why so much rebilled cost is a recharge with VAT applied. Check the precise conditions for your jurisdiction with an adviser before deciding.

Why getting it wrong is expensive

Because hardware, licences and hosting recur across almost every project, a single wrong assumption repeats itself many times over. Treating a recharge as a disbursement means you under-charge VAT and may face an assessment later; treating a disbursement as a recharge means you add VAT that should not be there and complicate your client's own recovery. Either way the error compounds across invoices.

The defensible approach is to decide the treatment per cost, per project, keep the third-party invoice and evidence of who it named, and record whether you acted as agent and had the client's authority. Where you mark up or bundle a cost into your own service, it is almost certainly a recharge. Keeping the underlying paperwork and a clear trail of who paid what, for whom, is what lets you, or your adviser, justify the call if it is ever questioned.

How Altery fits

Altery does not make the disbursement-versus-recharge decision for you; that turns on the conditions above and is a matter for you and your adviser. What it can do is make the underlying spend traceable, which is exactly what a defensible call needs. Business cards with per-card limits and merchant controls let you put client-related procurement on a dedicated card, so hardware, licences and hosting bought for a particular client stand apart from your general spend.

Ring-fencing money in pots lets you separate funds held for a specific client or project, and multi-currency business accounts holding USD, EUR and GBP mean you can pay overseas suppliers, the major cloud platforms or per-seat tools, in their own currency and convert on your timeline. Each transaction sits against a clear, real-time record, so you can reconcile what you paid out against what you rebill per client. Altery is not a bank, and this is general information rather than tax advice, but auditable per-client spend makes the VAT call easier to evidence and your records easier to stand behind.

Frequently asked questions