VAT on disbursements
VAT on disbursements practice note – 19 February 2009
1. Introduction
1.1 Who should read this practice note?
Solicitors dealing with invoicing, making and receiving payments that include disbursements and VAT.
1.2 What is the issue?
Within your practice, many solicitors refer to a variety of costs related to providing your service as disbursements, such as travelling expenses. But these costs might not qualify as disbursements for VAT purposes.
You must charge your client VAT when billing if an item is not a disbursement for VAT purposes.
This practice note seeks to clarify this issue to help you identify what is or is not a disbursement for VAT purposes. It is complementary to HMRC's guidance.
2. VAT on qualifying disbursements
If HMRC considers a payment to be a disbursement for VAT purposes, the item is deemed to have been provided directly to the client.
Therefore VAT on disbursements is:
- not charged to the client by the solicitor
- not reclaimed from HMRC by the solicitor
- only reclaimable by clients who are VAT registered and have obtained a valid VAT invoice, and this reclamation is subject to the usual conditions
3. Qualifying disbursements
HMRC considers a disbursement for VAT purposes to be a payment made to a third party by a supplier on behalf of a client, as the client's agent. Any payments you make to third parties on behalf of a client can be treated as disbursements for VAT purposes.
Therefore you do not charge VAT when billing your client for that item.
To qualify as a disbursement, the following criteria must be met:
- You acted as the agent of your client when you paid the third party.
- You charged your client the precise amounts you paid out, eg without any mark-up for profit.
- Your client authorised you to make the payment on their behalf.
- Your client knew that the goods or services would be provided by a third party.
- Your client actually received and used the goods or services provided by the third party.
- Your client was responsible for paying the third party, eg estate duty or stamp duty.
- The item was separately itemised when you invoiced your client.
However, costs incurred by suppliers/solicitors in the course of making their own supply to the client cannot be treated as disbursements. These must be included in the value of those supplies when VAT is calculated.
Costs that can be treated as disbursements for VAT purposes include:
- medical fees, reports, records, expert opinions
- expert services, such as an interpreter
- surveyor's fees
You must consider who received the benefit of the services provided to decide whether expenditure on such services qualifies as a disbursement for VAT purposes.
An invoice for an interpreter can be a disbursement if:
- The interpreter is needed so that the client can communicate with you, or for them to understand court proceedings. Here, the supply will be to the client
- You receive an invoice from the interpreter.
An invoice for a translator cannot be a disbursement if the translation was commissioned to enable you to understand a document and advise the client accordingly: the client did not directly receive the benefit of the supply.
4. Payments or disbursements not qualifying
Normal costs incurred in performing a service as part of your business cannot be treated as disbursements for VAT purposes. If an item is not a disbursement for VAT purposes, you must charge the client VAT when billing.
For example, HMRC considers postal charges as an integral part of a solicitor's service, reflected in fee rates, so not a disbursement for VAT purposes.
Costs that cannot be treated as disbursements for VAT purposes include:
- costs incurred or services provided by you in the course of providing a service to your clients, eg account administration
- business expenses, such as travelling and subsistence costs, telephone bills, postage costs and other office costs
- bank transfer fees to or from your own professional account
- royalty or licence fees incurred in providing goods or services to your client.
5. VAT on counsel's fees
HMRC allows you to choose whether to treat counsel's fees as qualifying as a disbursement for VAT purposes or not. You may either:
- Treat counsel's fees as not being a disbursement for VAT purposes. To do this, you should show fees as inclusive of VAT and levy your bill in the usual way, claiming counsel's fees as part of your services to your client.
- Treat counsel's fees as a disbursement for VAT purposes. To do this, you should insert on the fee note your client's name and the word ‘per' immediately before your name, or cross out your name and insert the name of your client. In this case the supply is deemed to have been made direct to your client.
6. Advantages to your client of disbursements
Treating a payment as a disbursement for VAT purposes means you do not add VAT to the disbursement when you bill your client. This helps save money for any clients not registered for VAT, or otherwise not entitled to reclaim VAT on these costs either directly from you or from the third party.
7. Keeping records of disbursements
You must keep records to show:
- you were entitled to exclude the payment from the value of your own services to your client
- you did not reclaim VAT on the goods or services provided by the third party
Such records should include order forms and copy invoices.
8. More information
8.1 Professional conduct
In addition to considering whether costs are disbursements for VAT purposes, you may need to consider whether a payment is a disbursement, and if so, the type of disbursement, for the purposes of the Solicitors' Accounts Rules 1998.
8.2 Further products and support
8.2.1 Practice Advice Service
The Law Society provides support to solicitors on a wide range of areas of legal practice. The service is staffed by solicitors and can be contacted on 0870 606 2522 from 09.00 to 17.00 on weekdays.
www.lawsociety.org.uk/practiceadvice
8.2.2 Law Society publications
Solicitors' Accounts Manual - 10th Edition
Solicitors and the Accounts Rules
8.3 Status of this practice note
Practice notes are issued by the Law Society for the use and benefit of its members. They represent the Law Society's view of good practice in a particular area. They are not intended to be the only standard of good practice that solicitors can follow. You are not required to follow them, but doing so will make it easier to account to oversight bodies for your actions.
Practice notes are not legal advice, nor do they necessarily provide a defence to complaints of misconduct or of inadequate professional service. While care has been taken to ensure that they are accurate, up to date and useful, the Law Society will not accept any legal liability in relation to them.
For queries or comments on this practice note contact the Law Society's Practice Advice Service.
www.lawsociety.org.uk/practiceadvice
8.4 Terminology in this practice note
Must - a specific requirement in the Solicitor's Code of Conduct or legislation. You must comply, unless there are specific exemptions or defences provided for in the code of conduct or relevant legislation.
Should - good practice for most situations in the Law Society's view. If you do not follow this, you must be able to justify to oversight bodies why this is appropriate, either for your practice, or in the particular retainer.
May - a non-exhaustive list of options for meeting your obligations. Which option you choose is determined by the risk profile of the individual practice, client or retainer. You must be able to justify why this was an appropriate option to oversight bodies.
8.5 Acknowledgements