Sometimes you’ll pay for something while completing work for a client, then ask the client to pay you back. This might be travel, materials, postage, groceries or a fee paid on their behalf.
Although these payments are often called “reimbursements”, there are two different ways they can be treated:
A recharged expense is a cost of providing your own goods or services.
A disbursement is a payment you make as your client’s agent.
The difference matters because it determines whether the amount is part of your business income and whether you should add GST.
If you’re still unsure after reading this article, please send us a message using the in-app chat.
In this article:
What is a recharged expense?
A recharged expense is a cost that you incur as part of providing your own goods or services.
You buy the product or service for your business, then charge some or all of the cost to your client. The client may call this a reimbursement, but for tax purposes it is generally part of the amount you charge for your own services.
Common examples include:
Materials used to complete a job.
Travel and accommodation needed to perform your work.
Software purchased to complete a client project.
Printing, photocopying, postage or courier costs.
Ingredients used to provide a catering service.
A subcontractor you engage to help complete the work.
Mileage or vehicle costs charged to a client.
Any cost that you mark up before charging it to the client.
The amount you receive from the client is business income. The original purchase may be claimed separately as a business expense, provided it meets the normal rules for claiming expenses.
What is a disbursement?
A disbursement is a payment you make to a third party as your client’s agent.
The product or service is supplied to the client. The client is responsible for the cost, and you simply pay it on their behalf before being repaid.
A genuine disbursement is not payment for your own goods or services. It is generally not treated as your business income or expense, and you do not add GST when asking the client to repay it.
A disbursement will usually have all of the following features:
The client authorised you to make the purchase on their behalf.
The client is the actual buyer or recipient.
The client receives the benefit of the purchase.
The client is responsible for the cost.
You charge the client exactly what you paid.
You do not add a markup to the amount.
You keep the supplier’s receipt or other supporting information.
Your agreement and records support the fact that you were acting for the client.
Common examples may include:
A court filing fee paid by a lawyer for a client.
A permit or registration fee paid in the client’s name.
Groceries bought for a home-care client’s personal use.
A product specifically selected by and bought for the client, where the client is responsible for the purchase.
A fee that the client was legally required to pay but authorised you to pay for them.
Note: The name you put on an invoice does not determine the tax treatment. Calling something a “disbursement” does not make it one if it was really a cost of providing your own service.
What does it mean to be an agent?
An agent is a person who has authority to act on behalf of another person, known as the principal.
For a disbursement:
You are the agent.
Your client is the principal.
The third party supplies the product or service to your client.
You arrange or pay for the purchase on your client’s behalf.
Being self-employed, a contractor or a service provider does not automatically make you your client’s agent. You are only acting as an agent for a particular purchase when you and the client have agreed—either expressly or clearly through your conduct—that you can make that purchase on their behalf.
A quick way to tell the difference
Ask: Who was the real buyer?
If you were the buyer and the purchase helped you provide your service, it is usually a recharged expense.
If the client was the buyer and you merely arranged or paid for the purchase on their behalf, it may be a disbursement.
The following questions can help:
It is more likely to be a recharged expense if:
You chose the supplier or purchase as part of running your business.
The supplier looked to you for payment.
The purchase was made in order for you to deliver your service.
You remained responsible for the cost if the client did not pay you.
You used the item yourself while completing the job.
You added a markup, administration fee or handling charge.
You charged a fixed amount rather than the actual cost.
The purchase could be used across several clients.
It is more likely to be a disbursement if:
The client asked or authorised you to make the specific purchase.
The purchase was made for that particular client.
The product or service belonged to or was supplied to the client.
The client was responsible for the cost.
You passed on the exact amount without a markup.
The supplier’s documentation identifies the client, where appropriate.
Your agreement says you can make purchases as the client’s agent.
You can give the client the original receipt or supporting information.
No single factor decides the answer. The full arrangement between you, the client and the supplier needs to be considered.
How to invoice recharged expenses in Solo
Add a recharged expense to the same invoice as your other goods or services.
To create the invoice:
Go to the Invoices page in Solo.
Click the Create an invoice button.
Add your normal services or products.
Add a separate line describing the recharged expense.
If you’re GST registered, leave Enable GST switched on.
Save and send the invoice.
You can learn more in our How invoicing works article.
If you’re GST registered, GST is calculated on the full invoice subtotal. This generally applies even if:
You charged the client exactly what you paid.
The supplier did not charge you GST.
The original cost was GST exempt.
The expense description includes the word “reimbursement”.
This is because the recharged amount forms part of the total amount you charge for your own supply.
If you add a markup or handling charge, the full amount charged to the client is part of your income. Do not record only the markup as income.
How to invoice disbursements in Solo
A genuine disbursement should be shown separately from your taxable goods or services and should not have GST added by you.
If you’re GST registered
Solo does not currently support GST and non-GST line items on the same invoice. You’ll need to create a separate invoice for the disbursement:
Create and send your normal invoice for your goods or services with Enable GST switched on.
Create a second invoice for the disbursement.
Switch Enable GST off on the disbursement invoice.
Clearly describe the amount as a disbursement paid as agent for the client.
Enter the exact amount you paid.
Add a note identifying the supplier, purchase and date.
Give the client a copy of the supplier’s receipt or other supporting information.
Important: Switching GST off is appropriate only where the payment is a genuine disbursement. Do not switch GST off simply because you are recovering an expense at cost.
We know that sending two invoices is not always convenient. Solo is planning to add support for disbursements on invoices so GST-registered users can include taxable services and genuine disbursements together.
If you’re not GST registered
GST is not added to your invoices, so you can include the disbursement and your services on the same invoice.
Use separate lines and clearly label the disbursement so that both you and your client can identify it.
How to record the payments in Solo
Invoices do not affect Solo’s income and tax calculations. Those calculations are based on your categorised bank transactions and pre-taxed income feed.
Recharged expenses
For a recharged expense:
Categorise the original purchase using the appropriate business expense category.
Categorise the client payment as business income when it appears in Solo.
This records both sides of the transaction correctly. The expense reduces your profit and the amount recovered from the client increases it.
Genuine disbursements
A genuine disbursement is not your business income or expense.
When the payment and repayment appear in Solo, exclude both transactions from your tax calculations. You can use the Archive category for the outgoing payment and the repayment.
Add a useful note to each transaction, such as:
“Groceries purchased as agent for client—repaid at actual cost.”
This makes it easier to match the payment, repayment and receipt if you need to check them later.
Tip: If a client combines payment of your service invoice and disbursement invoice in one bank transaction, split the transaction in Solo. Categorise the service portion as business income and archive the disbursement portion.
Keep good records
Keep enough information to show why you treated an amount as a recharged expense or disbursement.
Useful records include:
Your agreement with the client.
Written authority to make purchases for the client.
The client’s shopping list or instructions.
Supplier receipts and invoices.
Proof of payment.
Copies of your invoices to the client.
Notes showing who received and owned the purchase.
Evidence that you recovered only the actual cost.
For a genuine disbursement, give the client the supplier’s receipt or a copy where practical. This may also help a GST-registered client determine whether they can claim GST on the underlying purchase.
Common mistakes to avoid
Calling every repayment a disbursement
A client paying you back does not automatically make the amount a disbursement. Most costs incurred while delivering your own service are recharged expenses.
Turning off GST for ordinary expenses
If you’re GST registered, GST will generally apply to recharged expenses as part of your total service—even where the original supplier did not charge GST.
Claiming GST on a genuine disbursement
If you bought something as the client’s agent, the purchase is treated as being made to the client. You should not normally claim the purchase GST yourself or add GST to the repayment.
Adding a markup to a disbursement
A markup or administration charge is payment for your own service. Show it separately and apply GST if required.
Claiming the same cost twice
Do not claim the original purchase as a business expense and then exclude the client’s repayment as a disbursement. The two entries must be treated consistently.
Relying only on the invoice description
IRD considers the real arrangement, not just the words used on your invoice. Keep records showing that the client authorised the purchase and was the actual recipient.
Still not sure?
Agency arrangements can sometimes be difficult to identify. If the amount is significant, the arrangement is unusual or you regularly pay large costs for clients, consider checking with an accountant or tax adviser.
You can also read Inland Revenue’s detailed guidance on GST and agency.
If you need help creating the invoices or categorising the related transactions in Solo, send us a message using the in-app chat.