Disbursements are buying goods/services on behalf of your clients. Such payments are outside the scope of VAT and whilst VAT cannot be claimed in respect of the expense, no VAT is charged on them when you invoice the client.
Disbursements are not included in the VAT turnover calculation, BUT you must ensure they meet the conditions here: https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers
Disbursements are costs you incur on behalf of your client and these should meet the following tests:
- it was purchased for the use of the client
- the client agreed that you would arrange and pay for it on their behalf
- You pass the whole charge to the client, without adding anything, as a separate item on the invoice
- it is the client’s responsibility to pay for the goods/services
- the client knew the provider of the service is not you and you had permission from his client to make the payment
Accounting for Disbursements: Example say you incur £300 disbursements( Dr Disbursements £300 Cr Cash/Creditors £300); and then you pass the disbursements to the client (Dr Cash/Debtors £300 Cr Disbursements £300).
Disbursements should not be confused with recharges which are your own costs incurred when supplying goods or services to customers are not disbursements for VAT. For example, postage costs you incur when you send letters to your customers, these are normal business costs and you must add VAT if you recharge them. Recharges are part of your sales.