When running a business, it’s common to pass on costs to your clients – whether it’s travel, postage, or bank fees. But here’s a crucial point many business owners overlook: if you recharge these costs, you must also charge VAT, even if no VAT was charged to you in the first place.

This rule comes straight from HMRC, and it often catches businesses out.

Why VAT Applies to Recharges

The key reason is that these expenses are considered business costs incurred by you, not direct costs on behalf of your client. When you pass them on, they become part of your supply – and so VAT must be applied at the standard rate.

Examples from HMRC

Here are a few examples of common recharge situations and how VAT applies:

• Airline tickets – If you buy a flight to visit a client or travel to a job, then recharge that ticket to your client, you must charge VAT. That’s because the flight was for you, not for the client.

• Postage costs – Sending letters or documents to customers is part of your business overheads. If you recharge those postage costs, VAT must be added.

• Bank transfer fees – Even though your bank might not charge VAT on transfer fees, if you recharge that fee to your client, you must add VAT. The cost was incurred for your business, not directly for your client.

Don’t Confuse Recharges with Disbursements

It’s easy to mix up recharges with disbursements. A disbursement is when you pay a cost directly on behalf of the client, and the liability is theirs, not yours. In those cases, you don’t add VAT when recharging. For example, paying Companies House fees on behalf of a client could be treated as a disbursement.

But most everyday business costs – like travel, postage, and admin charges – are not disbursements. They are your costs, and VAT applies when recharged.

Key Takeaway

If you’re passing on costs to your clients, remember: VAT is usually due on recharges, regardless of whether you paid VAT originally. Misunderstanding this could lead to errors in your VAT returns and potential issues with HMRC.

At Charles Accountancy, we help small businesses stay compliant and tax-efficient. If you’re unsure whether a cost is a recharge or a disbursement, we’ll give you clear guidance so you don’t fall foul of HMRC’s rules.

👉 Need advice on VAT and recharges? Contact us today to get clarity and peace of mind.