#AskAnnette: How do I deal with disbursements and VAT?

Let's start by speaking about what disbursements are...

A disbursement is a payment that your business makes on behalf of one of your clients.  You are essentially just acting as their agent.  This can be for goods or services, received or used by your client.  And the customer must be aware that it was not you directly delivering these goods or services, and that they have been purchased by you, on their behalf.

Disbursements should not be confused with re-charges.  Re-charges are where your business has incurred a cost but the client (through the contract or agreement you have together) has agreed to cover the cost of that charge.  For example, let's say you need to fly to see the client, and the client has agreed to pay that airfare - that is a recharge.  The flight was for you, not for the client (and in that case, you would charge VAT)

Disbursements are outside the scope of VAT...which means:

When you then invoice that cost out to your client, you do not charge VAT at all (and if you are using Xero, you should set the VAT code to "No VAT")

Becuase disbursements are outwith the scope of VAT, not only can you not charge VAT when you invoice the client, you also cannot reclaim VAT charged on the goods/services (again, in Xero this would be treated as "No VAT").