What is a disbursement? A small business guide

If you make payments on behalf of your customers, these are usually known as disbursements.

Read on to find out the difference between disbursements and expenses, plus what they mean for your VAT return (if your business is VAT-registered).

What is a disbursement payment?

A disbursement is a payment that you make on behalf of a customer that you charge back to them. For example if you book something for a customer that isn’t part of your service, such as a train ticket, this is a disbursement.

It’s important to note the distinction between disbursements and expenses. If you were booking the train ticket for yourself so you could attend a meeting with your customer, then this would be an expense.

When invoicing a customer for a disbursement, you can’t:

• add VAT to the bill
• claim back VAT from the original cost

This means you can exclude the payment from your VAT return and your customer doesn’t have to pay two lots of VAT.

How disbursement works in business

Disbursements allow you to separate the payments requested on invoice. As well as providing goods or services to your customers, you may sometimes act as an agent and buy another good or service on their behalf.

By separating the payments, you can recharge your customers fairly. Being able to offer extra services to your customers as an intermediary can help you to build stronger business relationships and encourage loyalty.

What counts as a disbursement?

According to gov.uk, for a payment to be considered a disbursement it must meet the following criteria:

• you acted as an agent for your customer, paying the supplier on their behalf
• your customer received the goods or services that you paid for on their behalf
• your customer was responsible for the goods or services you organised
• your customer was aware that the goods or services came from another supplier
• you had permission from your customer to buy the goods or services
• you list the costs as separate to your own services on an invoice
• you don’t charge your customer any extra for providing the goods or services

Types of disbursement

A disbursement can be a range of different payments, but it’ll always be something you’ve paid for on behalf of your customer and not something you’re charging for as a result of your work.

A disbursement could be helping your customer buy something at the same time you’re buying something for yourself. For example if you’re travelling somewhere with your customer, you could buy their ticket at the same time as yours. The ticket you buy for yourself would be an expense, while the ticket you buy for them would be a disbursement.

Other types of disbursements could be for products or services that you don’t offer but are able to organise on behalf of your customer.

It’s useful to think of yourself as an agent in this situation. You’re the middle person who facilitates things for your customer, alongside providing your own services.

However, it’s important to remember you’re not acting like a professional agent such as an estate agent or recruitment agent. This is because disbursements must be recharged directly to your customer with no commission fee.

This article is intended as a guide only. Deciding on what is a disbursement and what is an expense can be tricky, so make sure you get help from a professional accountant or finance expert if you’re not sure of anything.

Examples of disbursement

Here are four examples of payments you could make on behalf of your customer that could be recharged as a disbursement:

1. You run a property development business and one of your customers needs a survey of a building they’re interested in buying.
2. You run a graphic design agency and one of your customers needs a new ecommerce platform for their website.
3. You run a tutoring business and one of your customers requests some books to help with their learning.
4. You run a bed and breakfast and one of your customers needs you to book them a taxi back to the train station.

What is the difference between expenses and disbursements?

There are lots of things that businesses need to pay for on a daily basis. Many of these will be expenses – costs for goods or services that are used to run your business.

Looking at our earlier example, any travel costs you pay as part of running your business can be considered an expense.

Read our guide to business expenses for more information.

What isn’t a disbursement?

Sometimes a business might decide to charge customers for its expenses. For example, when working for a customer you may run up costs for things like:

• printing
• postage
• travel
• food and drink

When you do this, you’ll need to charge the customer VAT on top of the expense (whether you paid it or not). You can’t recharge the expense as a disbursement because the cost was incurred by your business and not your customer.

How to show disbursements and recharges on your invoices

When separating expenses and disbursements, it’s important your invoices are correct so that you’re paying the right amount of tax.

Here’s an example of how the costs should be separated and shown on an invoice:

You run a creative agency and have just taken on a new client who wants a full review and revamp of their marketing strategy.

You’re based in Manchester and need to travel to their headquarters in Birmingham for four days to get the project started.

The followings costs are agreed:

• £3,000 (plus VAT) for a full review of the customer’s marketing strategy
• £250 for two night’s hotel stay (you agree to cover the costs of your travel)
• £500 for an annual subscription for photo editing software the customer needs

As a result, your invoice should show charges for:

• £3,250 (plus 20 per cent VAT) for your work and hotel expenses
• £500 disbursements for the software subscription

The customer’s total bill inclusive of VAT will be £4,400. Alternatively you may have decided not to charge your customer for the hotel expenses, in which case they wouldn’t be included on the invoice.

Read our guide on how to write an invoice and download our free invoice template for more information.

Do you have any unanswered questions on disbursements? Let us know in the comments.

More finance guides for small businesses

• The best joint business account for small businesses
• What limited company expenses can I claim?
• What is zero-based budgeting – and can it save your business money?
• Cash basis vs accrual accounting – what’s the difference?

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