Most agencies rebill client costs and treat it as simple admin. You pay the media invoice, the stock licence or a production supplier, add it to the client's bill, and move on. But VAT does not treat it as simple. Some of those pass-through costs sit outside VAT as disbursements, while others count as the agency's own supply and have to carry VAT. The line between the two is narrow and strict. If HMRC decides a cost you treated as a disbursement was really a recharge, the VAT you should have charged is due, with interest and possibly penalties on top.
To sit outside VAT as a disbursement, a cost has to meet all eight of HMRC's conditions, and the burden of proving it sits with you. The one HMRC calls the key condition in practice is that the client, and only the client, used the goods or services. The others a finance team can check from the record include that you paid the supplier as the client's agent, that you recharged exactly the amount you paid, and that it is itemised separately on the client's invoice. On top of the eight, HMRC also expects you to show you claimed no input tax on it, which means keeping disbursements in separate records. Most agency finance teams know the rule exists, so the trouble usually isn't the rule itself.
Where the VAT actually goes wrong
The issue originates in the data. A recharged media cost gets coded the same way as every other cost out of habit. Nothing is recorded about whether it was incurred as the client's agent or as the agency's own purchase, or whether it will be rebilled at cost. That means that, by the time anyone comes to apply the VAT test, the record simply doesn't carry what the test needs. Miss that at the point of spend and you're left reconstructing intent months later from a bank line and someone's memory of a project that has long since closed.
The distinction has to be captured when the cost is incurred, because that is the only moment the context is actually known.
Why leaving it to year-end is too late
This is precisely why 'we'll let the accountant sort the VAT at year-end' only works up to a point. An accountant can apply the disbursement-versus-recharge test cleanly when the data behind it is clean, but hand them a pile of inconsistently coded pass-throughs and the same judgement turns into guesswork. The rule can only ever be as reliable as the record you apply it to, and a rushed year-end reconstruction is hard to defend if HMRC asks.
Clean treatment starts at capture
The practical move is to make the record complete at the point of spend rather than at filing. That means three things on each pass-through as it enters the system:
1. Completed VAT fields
2. Cost tagged to the right client and project
3. A field that records how the cost will be treated, as a disbursement, a recharge, or not rebilled at all
With those in place the correct treatment can be applied consistently later rather than pieced back together. This is straightforward data discipline that is well within a finance team's reach.
This is where Moss Expense Management and AP can help. Mandatory fields, including custom ones, can be enforced at capture, so a transaction cannot move forward without its VAT details and its recharge treatment filled in. Cost centres and projects carry the client, and the export takes all of it through to the accounting system, so finance and the accountant work from consistent data instead of reassembling it. Whether a given cost is a true disbursement or a recharge is a judgement for the agency's accountant, informed by the eight conditions.
The call that stays with your accountant
Clean data doesn't remove the need for professional judgement, nor should it. What it does is make that judgement possible to apply. When your accountant reviews recharges at quarter or year-end, they are working from records that already carry the VAT treatment and the client tagging, so the answer they reach is one they can defend rather than one reconstructed under time pressure. If HMRC does query a recharge, the trail behind it is there to show.
If VAT on pass-throughs is a regular feature of your billing, it is worth checking that your expense data captures what your accountant needs at the point of spend. To see how mandatory fields, client and project tagging and the accounting export work in practice, take a look at Moss Accounts Payable and Moss Expense Management.
