Let’s be real – accounting can sometimes feel like it’s speaking a whole different language. With all the jargon and technical terms flying around, it’s easy to feel a bit lost. But don’t worry – that’s what we’re here for! We’re all about making things simple, so let’s break down two key terms that often trip up small business owners: disbursements and rechargeable expenses.
What Are Disbursements?
Disbursements are expenses you pay on behalf of your client. Think of yourself as the middleman – you cover a cost upfront, but it’s actually the client’s responsibility, so you pass it straight back to them at the exact amount you paid. No markups, no profit – just a straight reimbursement.
For example, let’s say a solicitor is handling a case and has to pay court fees. They pay the fees on behalf of the client, but the client is responsible for covering the exact cost. The solicitor is just sorting the payment to make things easier.
And here’s a key VAT point: If the supplier (in this case, the court) charged VAT, the solicitor still passes the cost to the client without adding VAT on top. If the court fee is £120, the client is charged £120 – no extra charges.
What Are Rechargeable Expenses?
Rechargeable expenses work a little differently – these are costs you incur while providing a service to a client, and then you bill them for these expenses as part of your work.
For example, if a consultant travels to meet a client and racks up costs like train tickets or a hotel stay, they can pass those costs onto the client as part of their service agreement.
Now, let’s talk VAT! If you’re VAT registered, you’ll need to add VAT to the total amount when you recharge the expense – even if the original expense didn’t have VAT on it.
Here’s how that works:
- A consultant spends £120 on a hotel room, which includes £20 VAT. They can reclaim the £20 VAT from HMRC.
- When invoicing the client, they must add VAT on top of the total amount. So, they charge the client £120 + 20% VAT = £144.
- The consultant then pays the £24 VAT to HMRC.
The Bottom Line
We know these terms might sound a bit complicated, but the difference is actually pretty straightforward: Disbursements are costs you pay on behalf of a client and pass on at cost, whereas rechargeable expenses are costs you incur while working and bill to the client as part of your service.
It’s all about keeping things clear and making sure your invoices and VAT are spot on. And the good news? You don’t have to figure it all out on your own! If you’re unsure how this applies to your business, just drop us a message – we’re here to help!
Ready to get your finances in order? Complete our quick questionnaire and book in a discovery call with us today!
Want tax tips and advice? Check out PPF on YouTube
