VAT on recharges and management fees: the questions to ask

What this guide is, and is not

The reason this subject causes trouble is not that the rules are exotic. It is that three different arrangements look identical on a bank statement: money you spent, money you passed on, and money you charged for spending it. VAT treats them differently, and the statement line has to reflect whichever one it is.

The three things people mix up

1. Your own supply

The service you provide to the owner — managing the property. Your fee is consideration for that supply. Whether VAT applies to it depends on your VAT registration status and the nature of the supply, and that is a question for your accountant rather than for a guide.

2. A recharge (sometimes called a recharged expense)

You buy something in order to provide your service, and pass the cost on to the owner. You contracted with the supplier. The supplier invoiced you. You used the thing — or arranged it — as part of what you do for the owner.

The essential point people miss: a recharge is generally treated as part of what you are supplying, not as a neutral pass-through. Calling something a "recharge at cost" does not, by itself, change how it is treated. HMRC’s guidance on recharged costs is the place to check what follows from that.

3. A disbursement

You pay a cost that is genuinely the owner’s own liability, acting as their agent, and pass it on unchanged. The supply was made to the owner, not to you. The classic examples are statutory fees and charges that the owner is legally obliged to pay.

Disbursement treatment is narrow, and HMRC sets out conditions that all have to be met. Most costs a managing agent incurs — cleaning, linen, maintenance, consumables — are arranged by the agent with the agent’s own suppliers, which tends to put them in the recharge category rather than the disbursement one. Tends to is not the same as always, which is why the contracts matter.

The questions that decide which one it is

Whatever the arrangement is called in your agreement, the facts are what count. These are the questions to be able to answer for every cost type you handle:

1. 1Who did the supplier contract with — you, or the owner? Look at the invoice and at who agreed the work.
2. 2Who is named on the supplier’s invoice, and to whom was the supply made?
3. 3Did the owner authorise you specifically to pay this on their behalf, as their agent?
4. 4Did you use the goods or service yourself in the course of providing your own service?
5. 5Are you passing on the exact amount, or adding anything to it?
6. 6Do your records separately identify the amount, and do you hold the supplier’s evidence?

Answer those for each category once, write the conclusion down, and apply it consistently. The risk is not usually a single wrong call — it is a category treated one way in March and another way in September.

Agent or principal, and why the agreement matters

Underneath the VAT vocabulary sits one commercial question: when you arrange a cleaner, are you buying cleaning and selling a managed property, or are you arranging for the owner to buy cleaning? Those are different businesses, and the management agreement should say which one yours is.

Agreements often say both, by accident. A clause saying you act as agent for the owner in procuring services sits two pages from a clause saying you engage contractors at your discretion and recharge at cost. When the facts are tested, wording that contradicts itself is not a help.

Have the agreement reviewed by someone who does this for a living, and make sure the way you actually operate matches what it says. Invoices addressed to you, supplier contracts in your name, and your staff directing the work all speak louder than a clause.

What it means for a statement line

Whatever the treatment turns out to be, the statement has to be able to show it. That means a cost line needs enough structure to carry the distinction, rather than a single amount:

• The net amount and any tax shown separately, rather than only a gross total.
• The supplier named, so it is clear who made the supply.
• The category, so all costs of a type are treated the same way.
• The evidence attached, because the treatment you claim is only as good as the document behind it.
• A visible separation between costs passed on and your own fee, so the two are never read as one amount.

What to keep on file

• The supplier’s original invoice or receipt for every cost you pass on, stored against the cost rather than in a folder somewhere.
• The management agreement version that was in force for the period, not just the current one.
• A written note of the treatment you apply to each cost category, dated, with who advised it.
• Any written authority from the owner to incur or pay a specific cost on their behalf.
• The statement as it was sent, unchanged.

Most of that is a by-product of closing the month properly. If receipts are attached when the cost is captured, the file builds itself. How the monthly close captures evidence.

When to stop reading and ask

Get professional advice before, not after, any of the following:

• You are approaching, or think you may have passed, the registration threshold.
• You are changing your fee model, or introducing a coordination charge on top of costs.
• You are taking on a new category of cost you have not handled before.
• An owner asks you to treat a cost as a disbursement.
• You operate across more than one legal entity, or handle client money.
• Your agreement is being rewritten.

The cost of an hour with an accountant is small next to the cost of a category treated wrongly for two years.

A short checklist