You buy a sofa for a client. You add a margin. You invoice them. Simple, until you ask whether VAT applies to the whole charge or none of it, and whether that £4,000 even belongs in your turnover.
Get the treatment wrong and you can over-state your income, register for VAT later than you should have, or charge VAT you didn't need to and lose the client's goodwill. Get it right and your books are clean, your VAT position is defensible, and your margin is protected.
This guide is for UK interior designers, whether you run as a sole trader or a limited company. We'll cover when a client payment is a true disbursement, when it's a recharge, how a markup changes everything, and how it all feeds into your VAT registration and your tax return. Figures are for the 2025/26 tax year.
What's the difference between a disbursement and a recharge?
It's the single most useful distinction in interior design billing, and the words get used loosely. They are not the same thing for VAT.
A disbursement is a cost you pay strictly on your client's behalf, as their agent, and pass on at exactly the amount you paid. It sits outside the scope of VAT, so you don't add VAT to it and it isn't part of your own supply. Think of it as money flowing through you to a third party that was always the client's bill to settle.
A recharge is a cost your own business incurs while delivering your service, which you then bill on to the client. It's part of what you supply. If you're VAT-registered, you charge VAT on it, even if the original cost had no VAT on it.
HMRC sets a strict test for a disbursement. To treat a payment as a disbursement, all of the following must apply:
- You paid the supplier acting as your client's agent.
- Your client received and used the goods or services.
- It was your client's responsibility to pay, not yours.
- You had your client's permission to make the payment.
- Your client knew the goods or services were from another supplier, not you.
- You show the cost separately on your invoice.
- You pass on the exact amount you paid, with no markup.
- The goods or services are in addition to your own services.
Miss any one of those, and it isn't a disbursement. It's a recharge, and it's VATable if you're registered. The conditions come straight from HMRC's guidance on costs and disbursements passed to customers (see Sources).
Why does a markup change the VAT treatment?
Because of the seventh condition above: a disbursement is passed on at the exact amount you paid. The moment you add a margin, you've broken the test.
That isn't a technicality. If you mark goods up, you're not simply settling someone else's bill as their agent. You're buying as principal and selling on at a profit. The whole charge to the client, cost plus margin, is then your own taxable supply.
So the rule of thumb is blunt and worth memorising:
If you want a margin on goods you buy for a client, you are almost certainly the principal. The full amount you charge is part of your turnover, and if you're VAT-registered you charge VAT on all of it.
This is where a lot of designers come unstuck. You can't buy a £2,000 lamp at trade, sell it to the client for £3,000, and call the £2,000 a "disbursement" to keep it out of VAT. The markup makes it a sale.
If you genuinely want goods to be a disbursement, the cleanest structure is for the client to buy direct: the supplier's invoice is in the client's name, sent to the client, and you only charge a separate, clearly-stated procurement or sourcing fee for arranging it. That fee is your supply and is VATable if you're registered, but the goods stay off your books entirely.
How do I decide which one applies to my project?
Run each cost through these steps. Stop at the first "no".
- Did you add any markup or commission to the cost? If yes, it's a recharge (you're the principal). The whole charge is your turnover. Stop here.
- Is the supplier's invoice in the client's name and the goods delivered to them, with the client ultimately responsible for the bill? If no, it's a recharge.
- Did you pass on the exact amount, shown separately, with the client knowing it came from a third party? If no, it's a recharge.
- Only if every answer above points the right way: it can be treated as a disbursement, outside the scope of VAT.
In practice, the cleanest split most studios land on is this: charge a transparent design or procurement fee that is unambiguously your supply, and either (a) mark goods up and treat the whole goods charge as your sale, or (b) have the client buy goods direct so they're a true disbursement or out of your books altogether. Mixing the two on the same item is where the trouble starts.
Worked example: a £6,000 furniture order with a markup
Illustrative example. Maya is a VAT-registered interior designer trading as a sole trader. She sources a bespoke sofa and dining set for a residential client. The trade cost from her supplier is £6,000 plus £1,200 VAT (£7,200 total). She wants a 25% margin on the goods and also charges a £1,500 design fee.
Because she's adding a markup, the goods are her own supply, not a disbursement. She's the principal. Here's how it works through her books.
| Item | Amount |
|---|---|
| Goods at trade cost (input, ex-VAT) | £6,000.00 |
| Maya's 25% markup on goods | £1,500.00 |
| Net sale price of goods to client | £7,500.00 |
| Design fee (net) | £1,500.00 |
| Net total chargeable | £9,000.00 |
| Output VAT at 20% | £1,800.00 |
| Invoice total to client | £10,800.00 |
Now the VAT flows. The standard VAT rate is 20% for 2025/26 (see Sources).
- Maya reclaims the £1,200 input VAT she paid her supplier.
- She charges £1,800 output VAT to her client.
- Net VAT she pays over to HMRC on this job: £1,800 minus £1,200 = £600.
Her profit on the job, before her own overheads, is the £1,500 markup plus the £1,500 design fee, so £3,000. The VAT washes through; it's the client who bears it.
Contrast that with a true disbursement: if the client had bought the sofa direct from the supplier (invoice in the client's name) and Maya simply arranged it for a £1,500 fee, the £6,000 of goods would never touch her turnover or her VAT return. She'd account for VAT only on her £1,500 fee. The trade-off is that she gives up the £1,500 goods margin.
That's the real decision: margin on goods (and VAT on the lot) versus a clean fee-only model with the goods kept off your books.
Does procurement income count towards my VAT threshold?
Usually, yes, and this catches people out.
If you're the principal on goods, as you are whenever you add a markup, the full value you charge for those goods counts as your taxable turnover, not just your margin. So a studio doing a lot of "buy and sell on" procurement can sail past the VAT registration threshold far faster than the design-fee income alone would suggest.
The VAT registration threshold is £90,000 of taxable turnover on a rolling 12-month basis (current threshold; see Sources). If you procure £200,000 of furniture a year as principal, you're well over it on the goods alone, regardless of how modest your design fees are.
By contrast, where goods are genuine disbursements (client buys direct, you charge only a fee), only your fee income counts towards the threshold. That difference can decide whether you need to register at all. It's worth modelling before you settle on a billing structure. If you're weighing up the numbers, our self-employed tax calculator is a quick way to sense-check where your profit and turnover land.
How should I record this in my bookkeeping?
Clean records here save you at VAT time and at year-end.
- Recharged goods (you're principal): record the trade purchase as a cost (with input VAT if applicable) and the full charge to the client as sales income (with output VAT). Both sides hit your profit and loss; your margin falls out naturally.
- True disbursements: these are not income and not expense for you. Keep them out of your turnover. Show them as a clearly separate line on the client invoice, at the exact amount paid, and hold the supplier paperwork in the client's name on file.
- Always keep the supplier invoices. For disbursements the invoice should be in the client's name; for recharges it's in yours. That paperwork is what proves the treatment if HMRC asks.
Most designers find the recharge model simpler to run day to day, because everything just flows through sales and purchases like any other trading business. Disbursements need tighter discipline on whose name is on what. If your bookkeeping is starting to creak under project-by-project purchases, our bookkeeping services are built to keep this tidy.
What about my own design fees and project costs?
Your design fees, project management fees and consultation charges are straightforwardly your supply. They're income, and they're VATable if you're registered.
Your own running costs are allowable expenses against your profit, the usual self-employed categories apply: studio costs, software, professional subscriptions, travel to client sites, sample materials you keep, and so on. HMRC's guidance on self-employed expenses sets out the categories (see Sources). The test is the normal one: the cost must be incurred wholly and exclusively for the business, and anything with private use is apportioned.
A few that come up a lot for designers:
- Sample books, swatches and mood-board materials you buy and keep are your business cost, not a client disbursement.
- Travel to client sites and supplier showrooms is allowable; commuting to a fixed base isn't.
- Trade show attendance and CPD that maintains your existing skills is allowable.
All of this lands on your Self Assessment return as a sole trader, or your company accounts and corporation tax return if you've incorporated. For more on the self-employed side, see our guide for sole traders, and if you want help getting the return right, our Self Assessment service handles it end to end.
Want this set up properly from the start? Zmartly works with interior designers across the UK to structure procurement, get the VAT treatment right, and keep the books clean. Book a free 20-minute call with a Zmartly accountant.
FAQs
Can I treat furniture I buy for a client as a disbursement?
Only if you pass it on at the exact amount you paid, with no markup, the supplier's invoice is in the client's name, and the client was always responsible for the bill. The moment you add a margin, it's a recharge and (if you're VAT-registered) the full charge is VATable.
Do I charge VAT on a markup?
If you're VAT-registered and you mark goods up, you charge VAT on the whole charge to the client, the cost plus your margin, not just on the margin. You reclaim the input VAT you paid your supplier, so only the net difference is paid over to HMRC.
Does the full value of goods I buy for clients count towards the VAT threshold?
If you're acting as principal (you add a markup), yes, the full value counts as your taxable turnover, which can push you over the £90,000 registration threshold quickly. If goods are genuine disbursements with the client buying direct, only your fee counts.
Is a procurement or sourcing fee VATable?
Yes, if you're VAT-registered. A procurement, sourcing or project management fee is your own supply of services, so you charge VAT on it at the standard rate, regardless of how the underlying goods are treated.
Should I run my interior design business as a sole trader or a limited company?
It depends on your profit level, how much you want to reinvest, and your appetite for admin. Procurement turnover can also affect the VAT picture either way. It's worth getting tailored advice rather than guessing; we can model both for you.
