VAT on Expense Recharges and Disbursements: What Consultants Need to Know

You fly to Amsterdam for a client workshop. You buy a software licence your client needs. You hire a specialist subcontractor. In each case, you pay the cost, then rebill it to the client. The question is: do you charge VAT on the amount you rebill?

The answer depends on how the EU VAT Directive classifies the arrangement. Article 73 establishes the general principle: "The taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply." If the expense recharge is part of the consideration for your supply, it is subject to VAT.

The Directive then provides two paths. Article 78(b) includes incidental expenses in the taxable amount. Article 79(1)(c) excludes amounts paid as reimbursement of expenditure incurred "in the name and on behalf of the customer." The distinction between these two paths is the principal vs agent question — and it determines the entire VAT treatment.

The EU VAT framework recognises two fundamentally different arrangements when you pass costs on to a client:

Recharges (principal arrangement): You incur an expense in your own name, as part of delivering your service to the client. You then include that cost — possibly with a markup — in what you charge the client. The expense is part of your supply. VAT applies to the full amount.

Disbursements (agent arrangement): You pay a cost on behalf of the client, in the client's name. The supplier's contract is with your client, not with you. You are merely advancing money. You pass the exact amount through to your client without markup. This is not part of your supply. VAT does not apply to the reimbursement.

Article 78(b) states that the taxable amount includes "incidental expenses, such as commission, packing, transport and insurance costs, charged by the supplier to the customer." This is not a closed list — it covers any cost that is incidental to and forms part of the supply.

When you act as principal, the expense recharge is part of the consideration for your service under Article 73. You charge VAT on the entire amount billed to the client, including the recharged expenses. In return, you may deduct the input VAT on the original expense (subject to normal deduction rules).

Article 28 reinforces this: "Where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself." If you contract for a service in your own name — even if the client ultimately benefits — you are treated as having both received and supplied the service.

Article 79(1)(c) provides that the taxable amount shall not include "amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer and which are entered in his books in a suspense account."

This is the disbursement exception. If you genuinely incur an expense in the customer's name and on the customer's behalf, the reimbursement is not part of your taxable supply. You pass through the exact cost without VAT.

But Article 79(2) adds a critical constraint: "The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged." You must be able to prove the actual amount, and you may not deduct input VAT on the disbursement.

This makes sense: if the expenditure is not part of your supply, you have no right to deduct input VAT on it. The input VAT deduction, if any, belongs to the customer.

Article 79(1)(c) establishes the general principle: expenditure incurred "in the name and on behalf of the customer" and entered in a suspense account is excluded from the taxable amount. National tax authorities (such as HMRC in the UK) have elaborated this principle into a practical five-point test. For an expense to qualify as a disbursement, all of the following conditions — derived from national guidance rather than the Directive text itself — must be met:

The CJEU has developed extensive case law on when recharged expenses form part of a single composite supply. The key cases are:

CPP (C-349/96): A supply which comprises a single service from an economic point of view should not be artificially split. Where one element constitutes the principal service and other elements are ancillary, the ancillary elements share the VAT treatment of the principal service.

Levob (C-41/04): Two or more elements supplied by a taxable person are so closely linked that they form a single indivisible economic supply which it would be artificial to split. In that case, there is a single supply for VAT purposes.

Field Fisher Waterhouse (C-392/11): An office lease bundled with associated services (supply of water, heating, repair of structure and machinery including lifts, cleaning of common parts, and security) may constitute a single composite supply. The CJEU held that such services may constitute a single supply and referred the determination of whether they did so in the specific case back to the national court. The case illustrates that separate itemisation on the invoice does not, by itself, make them separate supplies.

The practical consequence: when you recharge travel, accommodation, or similar expenses as part of a consulting engagement, these costs are ancillary to your principal supply of consulting services. They form a single composite supply. VAT applies to the whole amount at the rate applicable to the principal service.

When you recharge expenses on a cross-border B2B invoice where the reverse charge applies, the entire invoice — including recharged expenses — follows the reverse charge mechanism. The recharged expenses are part of the taxable amount under Article 78(b), and the place of supply is determined by the general B2B rule under Article 44 (where the customer is established).

This means you do not charge local VAT on the recharged expenses. Instead, your client self-assesses VAT in their country under Article 196, on the full amount including recharged expenses.

Example: You are a Dutch consultant travelling to Germany for a client workshop. You book a German hotel (German VAT on the hotel bill). You invoice your German B2B client for €5,000 consulting fees plus €800 travel and accommodation. The entire €5,800 is reverse-charged. Your client self-assesses German VAT on €5,800. You deduct the German input VAT on the hotel through your Dutch VAT return or a VAT refund claim.

The accounting treatment must be consistent with the VAT treatment. Getting this wrong is a common audit issue.

Recharges (principal): Record the original expense as your cost (with input VAT recovery). Record the recharge to the client as revenue (with output VAT). The recharge appears in your profit and loss — both as a cost and as revenue. If you add a markup, the margin is your profit.

Disbursements (agent): Record the payment as a receivable in a suspense account (balance sheet only). When the client reimburses you, the receivable is cleared. The disbursement never appears in your profit and loss. No input VAT is claimed. No output VAT is charged.