This practice note is the Law Society's view of good practice in this area. It is not legal advice. [Read more]
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.
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 .
There are ten mandatory principles which apply to all those the SRA regulates and to all aspects of practice. The principles can be found in the SRA Handbook.
The principles apply to solicitors or managers of authorised bodies who are practising from an office outside the UK. They also apply if you are a lawyer-controlled body practising from an office outside the UK.
1.1 Who should read this practice note?
All solicitors and their legal cashiers who have to deal with invoicing, making and receiving payments which include VAT.
1.2 What is the issue?
An area which gives rise to difficulties in billing is identifying those items of expenditure incurred by a solicitor in the course of acting for his client which can be classified as disbursements for VAT purposes, and those which cannot.
Solicitors generally refer to 'disbursements' as money which they have to pay to third parties in connection with the matter they are dealing with on behalf of the client. Section 67 of the Solicitors Act 1974 refers to disbursements as 'costs payable in discharge of a liability properly incurred by him on behalf of the party to be charged with the bill'. These may include court fees, fees for medical or other expert reports or search fees in a property transaction. For VAT purposes however, disbursements are defined more narrowly.
You must charge your client VAT when billing if an item is not a disbursement for VAT purposes even if, had the client incurred the expense directly, no VAT would have been payable.
This practice note aims to clarify this issue and help you identify what is or is not a disbursement for VAT purposes. It is complementary to HMRC Guidance and sets out the view of the Law Society on the issues covered. You should note that this advice has not been discussed or agreed with HMRC and is not binding upon HMRC.
2 The basic rules
The starting point for deciding whether an expense incurred is a disbursement for VAT purposes is to look at Article 73 of the 2006 VAT Directive (2006/112/EC ) which provides that:
'...the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party'.
Article 79 of the 2006 VAT Directive provides:
'The taxable amount shall not include the following factors:
(c) amounts received by a taxable person from the customer, as repayment of expenditure incurred in the name and on behalf of the customer, and entered into his books in a suspense account .
The taxable person must furnish proof of the actual amount of the expenditure referred to in point (c) of the first paragraph and may not deduct any VAT which may have been charged.'
If the conditions laid down in Article 79(c) are met, and the requirements as to proof in the final sentence of Article 79 are met, the amounts falling within Article 79(c) do not form part of your 'supply' to your client and therefore can be treated as a disbursement for VAT purposes.
The House of Lords in Nell Gwynn House Maintenance Fund Trustees v C& E Commissioners  STC 79 confirmed that VAT law therefore draws a clear distinction in principle between:
(i) expenses paid to a third party that have been incurred by you in the course of making your own supply of services to your client and which are part of the whole of the services rendered by you to your client; and
(ii) expenses for specific services that have been supplied by the third party to your client and you have merely acted as your client's known and authorised representative in paying the third party.
Only in case (ii) can the amounts of the payments to the third party qualify for treatment as disbursements for VAT purposes, and do not form part of the consideration for your own services to your client.
The correct treatment depends on whether the item of expenditure is:
- a disbursement incurred through the agency of the solicitor, or
- a cost incurred by a solicitor as principal which is charged on to the client.
3 Which payments/expenses can be treated as a disbursement for VAT purposes?
3.1 HMRC's Practice
HMRC's practice is set out in paragraph 25.1.1 of HMRC VAT Notice 700, which states:
'You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met :
- you acted as the agent of your client when you paid the third party;
- your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent's own travelling and subsistence expenses, telephone bills, postage, and other costs being treated as disbursements for VAT purposes);
- your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client);
- your client authorised you to make the payment on their behalf;
- your client knew that the goods or services you paid for would be provided by a third party;
- your outlay will be separately itemised when you invoice your client;
- you recover only the exact amount which you paid to the third party; and
- the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account .'
HMRC's view is that all the conditions set out above must be satisfied before a payment can be treated as a disbursement for VAT purposes.
HMRC place a lot of reliance on the first and last bullet points and take the view that if the payment relates to services, such as a medical report, which is also used by you then they regard this as an integral part of the provision of the legal services to your client and as such the cost cannot be treated as a disbursement for VAT purposes. However, HMRC's argument using this view in the case of Barratt Gogh & Tomlinson v The Commissioners for Her Majesty's Revenue & Customs ( decision 20 January 2011 ) was rejected by the Tax Tribunal Judge.
3.2 Law Society view
The Society takes the view that HMRC's approach in deciding whether an expense is a disbursement for VAT purposes is incorrect. HMRC's Notice 700, is guidance and not the law. If the expense incurred by you meets the requirements of Article 79(c) then you should treat the expense as a disbursement for VAT purposes.
It is important to remember that it is not the description given to a payment that determines whether it can be treated as a disbursement for VAT purposes, but whether a payment is part of the consideration for the 'service supplied by you', which is dependant on what that service is.
In practical terms this means that in each case you should identify the supplier, the recipient and the nature of the supply. This approach is exemplified in De Danske Bilimportorer C-98/05 in which the European Court of Justice agreed that an expense was incurred 'in the interests' of the person identified as the recipient of the supply.
3.2.1 Criteria for qualification as disbursement
An expense will only be a disbursement if the supply is made by the relevant third-party to your client and not to you. To qualify as a disbursement the conditions to be met are:
a) Your client should have either requested that you obtain the service on their behalf or authorised you to do so.
b) In the case of a report or a search result, the final report should be sent to your client either by you or the supplier. You can retain a copy.
c) The amount you charge your client should be exactly the same as the amount charged to you by the supplier.
d) The expense should be separately itemised on the invoice you send to your client.
e) The supplier should be aware that the service is being provided to a third party, i.e. your client.
To comply with (b) you should give the original report to your client. Where this is not possible, for example the original search report must be provided to a mortgage provider or an original medical report must be made available to the court in a personal injury action, you must give a copy of the report to your client.
To comply with (e) you should tell the supplier the identity of your client. Where your client does not wish their identity to be revealed or the process involved (such as electronic form submission) does not enable your client's identity to be communicated to the supplier, you should provide the supplier with some identifying feature such as a client and/or file reference number.
3.2.2 Special considerations
It is important to note that this is not an easy area of VAT law. When considering whether the expense incurs VAT at the standard rate when charged to your client you should take into account the particular circumstances of each case, the evidence as presented and whether or not those circumstances fall within Article 79(c). This can, on occasion be very finely balanced indeed.
The conditions set out in HMRC guidance (section 25 of VAT Notice 700) may assist you in determining the VAT position but as the Barratt case illustrates, the guidance may not provide a definitive answer and you should exercise your own judgement. Examples are provided below to assist.
4 Practical examples of how different payments/expenses should be treated for VAT purposes
Solicitors should be aware of the VAT treatment of the following activities:
4.1 VAT and Property related disbursements
Many queries arise in relation to the expenses incurred when acting for clients on property transactions.
In property transactions, property is sold on a caveat emptor basis. Thus the onus is on the buyer to find out as much as possible about the property to be purchased. Normally a buyer would instruct you to undertake the necessary searches on their behalf, but increasingly, a seller may instruct you to obtain searches on their behalf to include in a sales pack to be provided to a buyer, to speed up the transaction process.
The searches that are carried out by you on behalf of your client may include searches such as commons, chancel, drainage and environmental searches and may include the following (available through NLIS and other online sources):
- Local Authority (LLC1, CON29R, CON29O)
- Land Registry (a whole range of searches are available)
- Water utilities (drainage and water CON29DW)
- Coal Authority (mining and Cheshire Brine)
- Environment Agency (flooding)
- Forestry Commission
- Highways Agency (road building and maintenance)
- Electricity (national grid)
- Gas (pipelines)
- Telecommunications (cabling)
- London Transport ( London Underground and Docklands Light Railway)
- Civil Aviation Authority (airports)
- British Waterways (canals)
- Ordnance Survey (maps and plans)
- Speciality searches (radon, clay, tin mining, limestone, gypsum, Cornish Tin, Chancel Repairs)
- Company/individual insolvency searches
These searches may be undertaken by your firm or, in the case of a local authority search, a personal search agency on your behalf. Searches may be done by post, in person or, increasingly, by electronic or online means.
The search results may impact on a buyer's decision about whether to proceed with the purchase, and would show whether there is anything which affects the property that is not in your client's interests.
You may need to consider the search result and advise your client of the result in layman's terms (i.e. in a report on title). HMRC may argue that the fact that you have made use of the search results to advise your client means that the supply of the search results is a supply to you and that the cost must be treated as part of your overall legal services subject to VAT at the standard rate, rather than treated as a disbursement.
It is the Society's view that this use of a search result is not the correct determining factor as illustrated in the Barratt case (see 3.1 above ). The act of obtaining a search result is quite separate. It does not form part of the service you provide to your client. Put another way, it is carried out by you, as agent, for and on behalf of your client.
The use you may make of such search results subsequent to you obtaining them is irrelevant to the question of whether the act of obtaining and paying for them is an inherent part of your service to the client, or one provided as agent, for convenience.
4.1.2 VAT position for most common property searches
Whether the expenditure on search fees can be treated as a disbursement for VAT purposes is only important where the supplier has not charged VAT. The fact that such expenditure can be treated as a disbursement means that the cost to the client will not be increased by the standard rate of VAT.
To ensure that such search fees can be treated as a disbursement, you should ensure that the conditions (a) ? (e) in 3.2.1 above are met. Therefore you should:
- Give or offer to provide the original search report to your client. If you must give this to the mortgage company, you should give a copy to your client and explain to them that the original search report has been provided to their mortgage company.
- tell the supplier the identity of your client. This can be effected by including in the standard search forms sent to the supplier some identifying feature such as a client and/or file reference number.
It is considered good practice to retain the original search results/report with the title deeds. To ensure that any search fees can be treated as a disbursement, you should therefore in all cases provide your client with a copy of the search results, and ideally have offered to provide them with the original. Failure to provide your client with, at least a copy of, the search results will mean that the fees cannot be treated as a disbursement. The consequence of this is that you will have to charge VAT to your client. This represents an increase in the cost to them where the search fees are not subject to VAT .
(a) Land Registry fees
Following agreement with HMCE (the predecessor to HMRC) in September 1994, when a seller's solicitor obtains an office copy entry (now known as official copies) and recharges the exact fee to his client he may treat it as a disbursement and outside the scope of VAT.
It is now common practice for official copies to be obtained on behalf of any party to the transaction; seller, buyer or mortgagee. It is the Society's view that this may be treated as a disbursement regardless of which party you act for, provided you recharge the exact fee,.
(b) Local Authority search fees
HMRC's view is that fees for local authority searches are subject to VAT when you charge them to your client. However, historically by concession , they are prepared to allow solicitors to treat postal search fees as disbursements so that VAT will not be payable on the amount of the fee which should thus be shown separately on your bill. At present HMRC contend that this concession does not apply to local authority searches that are requested and received electronically.
The Society's view is that provided conditions (a) - (e) in 3.2 above are met all fees for local authority searches, whether obtained by post or electronically, can be treated as a disbursement. This will be so even where the search form is submitted by post and the result received electronically or where the search is requested electronically and the result posted back.
Where a local authority search is carried out personally either by your firm or, as is more common, by a personal search agency, VAT must be charged on these fees. This is because the fee charged by the local authority for a personal search is for the supply of access to the official record and this is a supply that is made to you or the personal search agency, rather than your client.
Personal search agencies will charge you VAT on the cost of a personal search provided by them. The VAT element of the fee should be treated as an input for VAT purposes. The search fee (i.e. the net amount) should be treated as an item of expenditure (not as a disbursement) and added to your bill on which VAT is charged. The amount your client pays in total will be the same as that charged to you.
If you undertake a personal search without using an agency, the fee will be treated as part of your professional charges (although itemised separately on the bill) and you should charge VAT on these fees at the standard rate.
(c) Mining search fees
By agreement with the Coal Authority, the practice is to issue an appropriate VAT invoice with the result of a mining search fee. The VAT element of the fee should be treated as an input for VAT purposes. The search fee (ie the net amount) should be treated as an item of expenditure (not as a disbursement) and added to the bill on which VAT is charged. The position remains unchanged by the fact that these searches may be obtained electronically. The amount your client pays in total will be the same as that charged to you.
(d) Ordering searches using online search providers
Many solicitors obtain the searches that need to be undertaken as part of the conveyancing process online through the National Land & Property Information Service (NLIS) or other online search providers. NLIS (via the licensed NLIS channel providers) and other providers facilitate electronic access to the official sources of land and property information in England and Wales.
When you order searches online through an online search provider, for example a local authority search, an administration fee will be charged in addition to the local authority search fee. If you use an NLIS channel provider you may also be charged the NLIS Hub fee.
You will be charged VAT on the NLIS Hub fee and any administration fee. No VAT is charged on local authority search fees or land registry fees but will be charged on all other search fees. Some channel providers itemise each item separately, others group them according to category. You should therefore account for input tax in the normal way on any VAT you pay.
If you pass on to your client the cost of the hub fee and/or administration fees then these should be treated as items of expenditure and not as a disbursement. The net amount of the fee must be included in your invoice as part of your professional charges on which VAT is charged at the standard rate. The amount your client pays in total will be the same as that charged to you.
Where you have been charged VAT by the channel provider in relation to any search, eg mining search, then this should be treated as your input for VAT purposes. The search fee (i.e. the net amount) should be treated as part of your professional charges, although these fees will be itemised separately on the bill, and should bear VAT at the standard rate. In these circumstances the amount the client pays for the search will be the same as that charged to you.
4.2 Photocopying charges
Photocopying may be regarded as an integral part of a solicitor's service that is reflected in fee rates. Whilst this may be true in relation to the costs of copying a few ad hoc documents this is unlikely to be the case where a substantial amount of photocopying is required, eg to prepare court bundles. Many firms will therefore pass on the cost of such photocopying to their clients, provided the client has been informed, in advance, of the separate charge, in accordance with rule 2.03 of the Solicitors' Code of Conduct .
Such a charge would generally be regarded as a cost incurred in providing the supply of legal services to the client and as such would not be a disbursement for VAT purposes. The fee for photocopying would attract VAT at the standard rate.
However, this can be treated as a disbursement for VAT purposes if the photocopying had been done by an outside photocopying agency. In this instance, the invoice would show the value of the supply of photocopying services plus the VAT (if charged by that outside agency) separately.
4.3 Travelling expenses
As a general rule, travelling expenses incurred by a solicitor in the performance of his client's instructions are not disbursements and must be included as part of the solicitor's overall charge. This would include the taxi and train fares, toll charges and c ar parking.
This view was upheld in the Queen's Bench Division in the case of Rowe & Maw v. C&E Commissioners  STC 340. The solicitors, Rowe & Maw, claimed that rail fares incurred by them in the course of carrying out their client's instructions did not represent a taxable supply of services for VAT purposes, since the payment by the client of the sum demanded was not consideration for the supply, but reimbursement of the sums incurred by the solicitors as agents on the client's behalf. The court held that the expenditure was on the services supplied to the solicitors rather than to the client, and the charge made by the solicitors was part of the total consideration for all the services supplied to the client and could not be divided for the purposes of calculating VAT.
Where car parking charges are incurred, these should be treated in the same way as other travelling expenses as subject to VAT at the standard rate. Some charges are paid to VAT registered businesses, eg NCP car parks, whereas others are not, eg. council car parks. Given that these sums are likely to be only a few pounds, it would be administratively burdensome for you to have to check the VAT position of the car park provider and ascertain the VAT element of the car parking charges for input tax purposes. To reduce administration you may therefore charge your client the full fee and then charge VAT at the standard rate.
4.4 Telegraphic transfer fees
HMCE's views on the VAT treatment of telegraphic transfer fees were set out in a letter from the VAT Administration Directorate published in the Gazette on 18th November 1992 . This letter confirmed that telegraphic transfer fees are not disbursements for VAT purposes and must be subjected to VAT when passed on to the client. However, the letter also acknowledged that there had previously been uncertainties, and where HMRC staff had provided incorrect advice no action would be taken to recover VAT on past transactions.
In the Tribunal case of Shuttleworth & Co v Commissioners of Customs and Excise (LON/94/986A) it was held that the transfer of funds by a solicitor was part of the overall conveyancing service provided by a solicitor to his client. Therefore, a CHAPS fee paid by a solicitor to the bank could not, for VAT purposes, be treated as a disbursement in the solicitor's bill to his client.
4.5 Telephone or conference call charges
Generally, telephone calls would be treated as business costs, but some firms may have a policy to charge separately for the cost of telephone calls, eg for international calls or for the cost of a conference call, and having previously advised the client of such a policy in accordance with rule 2.03 of the Solicitors' Code of Conduct..
Even where these charges are itemised separately on the invoice, for VAT purposes they are regarded as part of the cost of providing the supply of legal services to your client and these charges would attract VAT. You should therefore account for input tax in the normal way and charge VAT at the standard rate on the value of the telephone calls or conference fee charges.
4.6 Debit/credit card fees
Your practice may have introduced a facility to allow your client to pay your fees by debit or credit card on the basis that they pay an additional fee to do so. Such a fee should be no more than that charged to you by the financial institution and is subject to the proviso that the client has been provided with clear information in advance that this is to be charged for separately, in accordance with rule 2.03 of the Solicitors' Code of Conduct.
These charges do not fall within the exemption for financial services. HMRC will regard the provision of such payment services as an ancillary aspect enhancing the main supply of legal services and as such the fee will be further consideration for the legal services you supply. Therefore, t hese charges are not disbursements for VAT purposes and so VAT should be added to these charges on your invoice.
4.7 Agency fees
The approach to be taken when instructing another firm to act as agent to attend a court hearing, if for example the court is in another part of the country, is to include the fees payable as part of the costs incurred in providing the supply of legal services to your client and the fee would attract VAT. You would record the input tax paid to your agents and add output tax to the net fee recorded on your invoice to your client. Your client would pay the same amount that you were charged by the agent.
4.8 Process servers fees
Process servers' fees are not considered by HMRC to qualify as a disbursement for VAT purposes as the supply is made by the process server to the engaging firm. Though a high degree of urgency and/or importance may be associated at times to the manner in which the documents are served, the supply could be made by an employee of the firm. The process server bills you direct, and not your client, thereby removing any liability for recovery from your client, and is therefore not in compliance with the conditions for qualification as a disbursement for VAT purposes.
The test is whether the nature of the costs incurred fall within the remit of the supply by you/your firm to your client. Most process servers consider that their service is provided to you, and not to your client and would only look to you for the fees.
This would therefore be regarded as a cost incurred in providing the supply of legal services to your client and the fee would attract VAT. Even though the process server does not charge VAT, the fee is still treated as part of your services and output VAT has to be added to the invoice to your client. Where the process server is registered or registrable for VAT, this just means that you also have to record the input tax. Either way, your client pays the same amount in respect of the process server's fees, regardless of the process server's VAT status.
4.9 Company registration fees
When you pay fees to Companies House to register a company on behalf of your client, no VAT is payable because Companies House is not in business for VAT purposes. As you are registering the company on behalf of your client the fees paid can be treated as a disbursement for VAT purposes.
4.10 Company search fees
If you use an agency to obtain obtain data from Companies House, when you recharge the search fee to your client, you may treat it as a disbursement and outside the scope of VAT, provided the search result is provided to your client. If you obtain information on a company so that you can properly advise your client, eg obtaining company accounts to see whether an application for security for costs should be made in court proceedings, then this will be regarded as a supply to you and the fees will not be a disbursement for VAT purposes.
4.11 Court fees
The Court Service is not in business for VAT purposes and so court fees do not include a VAT charge. As your client is required to pay these fees for the purposes of commencing, or taking any step in, court proceedings such payments can be treated as disbursements for VAT purposes. These fees will therefore not attract a VAT charge when you bill your client.
4.12 Experts fees (non-medical)
Experts are regularly instructed in connection with court proceedings, both civil and criminal, to give or prepare expert evidence. Court procedural rules provide that experts have an overriding duty to help the court on matters within their expertise. This duty overrides any obligation to the person instructing or paying them. Experts must not serve the exclusive interest of those who retain them. Experts can be asked by the court to produce an expert report or to give oral evidence in court as an expert witness.
The Civil Procedure Rules encourage the use of joint experts - in criminal proceedings this would be one expert for all co-defendants and in civil proceedings this would be for claimant and defendant. Wherever possible a joint report should be obtained. In such cases there will be a statement that all the instructing parties are jointly and severally liable to pay the experts' fees and, accordingly, that experts' invoices should be sent simultaneously to all instructing parties or their solicitors,as appropriate.
In deciding whether expenditure on experts' services can be treated as a disbursement for VAT purposes, it is necessary to consider who received the supply of the services provided. Where an expert's report has been obtained by you, f or example handwriting experts, printing experts as part of the evidence in support of your client's case then the Tax Tribunal decision in the Barratt case will apply and they can be treated as a disbursement.
4.13 Fees for medico-legal reports and medical records
4.13.1 VAT charged by health professionals
Health Professionals are defined in HMRC Notice 701/57 as including medical practitioners such as GPs and consultants, physiotherapists, osteopaths and chiropractors. Medical services provided by health professionals within the field in which they are registered to practise will be exempt from VAT as the primary purpose of the services is the protection, maintenance or restoration of the health of the person concerned.
Some services provided by health professionals will be taxable or exempt, depending on their primary purpose. This is particularly the case for medical reports and certificates, and in these cases, it is necessary to establish their principal purpose, before liability can be determined. See below for details.
Where the service is principally aimed at the protection, maintenance or restoration of health of the person concerned, the supply is exempt. However, as is most likely in their dealings with you, the supply will be taxable at the standard rate as the principal purpose of the service is to provide a third party with a necessary element for taking a decision.
Fees may be commonly incurred in three instances:
a) In obtaining copies of medical records
b) In obtaining a medico-legal report for use in court proceedings
c) In paying an expert's expenses for attending court to give evidence
a) Access to medical records
You may, on behalf of a client, request access to (or copies of) their health records including hand-written clinical notes, copies of letters to and from other health professionals, laboratory reports, X-rays and other imaging records, and printouts from monitoring equipment; or medical reports written about them. Such request may be made under under the Data Protection Act 1998 (a 'Subject Access Request' or SAR), the Access to Medical Reports Act 1988 and the Access to Health Records Act 1990.
Under the Data Protection Act, when the holder of the personal records (such as a GP) receives a SAR they are obliged to provide the information requested, but may make a charge for so doing. The maximum amount of the fee is set by Regulation, and is a nominal sum to cover the expense of complying with the legal obligation to give access. Guidance issued by the Department of Health states that the charges should be set at such a level as ensures the doctor will recover any cost they incur in providing the copies, but not so high that the doctor gains financially from providing this service.
Under the Access to Medical Reports Act 1988 a patient, or the solicitor on their behalf, is entitled to ask for a copy of a medical report made by their GP for insurance or employment purposes. Where such a request is made, the GP must provide one but can charge a reasonable fee to cover their costs incurred.
The Access to Health Records Act 1990 facilitates access to the health records of deceased persons only by that individual's personal representative and anyone with a claim arising out of the person's death. The holder of those records is legally required to provide copies of records requested under this legislation and they may charge a fee for so doing, but it must not exceed the cost of making and mailing the copy to the applicant.
HMRC accept that these Acts place health professionals under an obligation to provide copies of health records when requested to do so. Where a copy of all or part of a medical record or report is provided in accordance with such a statutory obligation, the fee for this is outside the scope of VAT. BUT where a copy of a health record is provided in circumstances that do not fall within one of these statutory obligations, that is a taxable supply, and liable to VAT at the standard-rate.
b) Provision of Medical Reports/Certificates
Medical Professionals are often asked to undertake medicals, write reports or provide medical certificates, to enable a third party to make a decision. For example, they may enable claims for compensation against insurance companies or in the courts or be a certificate required to excuse attendance at a court hearing.
Most supplies of certificates and reports are liable to VAT at the standard rate as they enable a third party, such as the Court, to make a decision and contain no element of therapeutic care. This is the case even where the services supplied are for the purpose of the Family Courts and where the ultimate decision arrived at by the court may concern the well-being of an individual. This is because the principal purpose of the services supplied is to enable the court to take a decision.
However, where the principal purpose of certificates and reports is to protect, maintain or restore the health of the individual, then they are exempt - for example, sick notes and certain reports required as part of adoption procedures.
Fitness certificates were one of the supplies considered by the ECJ in the case of Dr Peter d'Ambrumenil and Dispute Resolution Services (C-307/01) , and where they are provided as a condition of a person taking up a particular profession or sporting activity, they are taxable at the standard-rate. However, where they are provided to, for example, an employer for the purpose of ensuring that the employer recognises that the individual's health places limitations on certain activities, eg they should not undertake heavy lifting due to a severe back problem, then the purpose of the supply is principally to protect the health of the individual and is exempt.
If the value of fee income received by medical professionals for non exempt supplies is above the threshold for registration for VAT then those experts will register and charge VAT on their fees.
c) Expenses related to Court appearances
Where a health professional has attended court to give evidence of facts acquired as a result of their professional position or had given expert witness testimony to the court, the related expenses are liable to VAT at the standard rate if the health professional is registered for VAT as the principal purpose of their supply is to enable a third party, the court, to take a decision.
Allowances paid to doctors where they are called as an ordinary witness are considered to be outside the scope of VAT as in these cases, they are called as a member of the public, and not in their professional capacity.
HMRC notice 701/57 'Health professionals' gives guidance on the VAT liability of supplies commonly made by medical practitioners. This publication is available on the HRMC website.
4.13.2 VAT treatment by solicitors
It has become more common for medical experts to be registered for VAT since HMRC clarified their position on such fees in 1 May 2007 following the Dr Peter d'Ambrumenil case. Where you receive a fee for a medico-legal report that is subject to VAT you may treat that fee as a disbursement and account for it in one of the two ways set out in section 5 below. Whichever treatment you choose your client will pay the same amount as that charged to you.
Where you receive a fee for a medico-legal report from a non VAT registered medical expert, the decision in Barratt Gogh & Tomlinson v The Commissioners for Her Majesty's Revenue & Customs ( decision 20 January 2011 ) confirms that these fees may be treated by you as a disbursement. This means that you do not have to charge VAT on these fees when you invoice your client.
4.13.3 Using medical reporting agencies
Many firms now use medical reporting agencies to obtain health records and/or medical reports. These medical reporting agencies commonly charge a global fee for their services and do not set out separately the element of the fee that is charged by the medical expert they instruct. The medical reporting agencies normally charge VAT at the standard rate on the whole fee. It is unlikely that these fees can be treated as a disbursement since the medical agency is acting on your behalf to co-ordinate obtaining the medical records and any medico-legal report. The fees should be treated as set out in section 7 below.
4.14 Witness fees
The procedure rules for both criminal and civil proceedings require witnesses (other than experts) served with a witness summons to be offered or paid a sum to cover their travelling expenses to and from the court and compensation for loss of time. The amounts are fixed pursuant to the Prosecution of Offences Act 1985 and the Costs in Criminal Cases General Regulations 1986. These are payments that are made on behalf of your client because the witnesses are giving evidence in support of your client and as such can be treated as disbursements for VAT purposes. These fees will therefore not attract a VAT charge when you bill your client.
4.15 Interpretation services
Solicitors often act for clients who are unable to communicate with them and interpreters are instructed. Unlike the supply of general legal services (where the place of supply is where the client belongs), the place of supply of an oral interpreter at an event, such as a meeting, is where the service is performed. In respect of such services performed in the UK , it is therefore not necessary for the interpreter to consider the client's residence status as he or she will be required to charge VAT if he or she is so registered.
In deciding whether expenditure on oral interpretation services can be treated as a disbursement for VAT purposes, it is necessary to consider who received the benefit of the services provided. Where an interpreter is required in order for your client to be able to communicate with you or to enable your client to understand Court proceedings, the supply will be to your client. In these circumstances, if you (as agent) receive an invoice from the interpreter, it can be treated as a disbursement subject to the normal VAT rules for disbursements.
4.16 Translation services
The place of supply of written translation services or interpreters' services which do not take place at an event is where the customer belongs. It will therefore be necessary for the interpreter to decide who is receiving the supply of services to determine whether VAT is chargeable. For example:
(a) If your client has a document which needs to be produced in Court, but this needs to be translated beforehand, the supply of the translation services would be between the translator and client. If you (as agent) receives an invoice from the translator, it can be treated as a disbursement subject to the normal VAT rules for disbursements.
(b) If you have a document translated in order to understand it yourself so that you can advise your client accordingly, the translation fee cannot be treated as a disbursement for VAT purposes as your client did not directly receive the benefit of the supply of the translation services. The fee for the translation must be included in the value of your supply of legal services for VAT purposes.
In example (a), the supply of services is to your client and the place of supply for translation is where the recipient is, then whether VAT is chargeable will be determined by the place of supply rules.
If the translator is not registered for VAT, they would not charge VAT on any of their supplies.
4.17 Enforcement officer fees
In Business Brief 6/2000 HMCE confirmed that they were prepared to treat the debt enforcement services as supplies by Sheriffs to creditors. This meant that that where the creditors are registered for VAT they will be able to recover the VAT charged. The invoice should be made payable to the creditor by the Sheriffs even where the fees have been collected from the debtor.
Since 1 April 2004 when The Courts Act 2003 came into force, the enforcement of judgments is now undertaken by High Court Enforcement Officer or Certified Bailiffs. The Society's view is that the same approach should be taken where VAT charged by a High Court Enforcement Officer or Certified Bailiffs. Their supply of debt collection services is to the creditor. If you have instructed them on your client's behalf then the fees may be treated as a disbursement for VAT purposes.
Writs of execution are still lodged at the Sheriffs Lodgement Centre. VAT is payable in addition to the High Court Enforcement Officer's fee on the services for which the fee is payable, and must be paid by the judgment creditor at the time of delivery of the writ.
If the full debt is recovered, all fees are paid by the debtor. If in part, only a proportion of the fees are deducted from the money recovered.
4.18 Fees for police reports, etc
Police forces routinely charge for providing accident/collision reports, photographs and videos/DVD, modified abstracts of criminal cases, etc. VAT is charged by them on these fees. The primary purpose of these supplies is to enable you to advise your client in relation to criminal charges against your client or in relation to a damages claim. As such these fees will not be regarded as disbursements for VAT purposes. You should treat the VAT charged as your input tax for VAT purposes. The net amount of the fee should be treated as part of your professional charges and should bear VAT at the standard rate. In effect, the amount your client pays will be the same as that charged to you.
4.19 Specialist video production services (eg CCTV)
CCTV footage has become an integral part of many criminal cases. There may be occasions where you engage a specialist service to produce video copies where the action is slowed down, hard copies of individual frames, or enhanced/enlarged sections of images are produced. The primary purpose is likely to be regarded as one which better enabled you to consider your client's involvement in an alleged offence or whether there is a credible defence to the charges brought. As such these services will be treated as supplied to you not the client.
Where the fees paid include VAT you should record the input tax in the usual way and charge your client VAT on net value of the fees you have paid. If no VAT is paid by you because the supplier of these services is not registered or registrable for VAT you still need to charge your client VAT on the fees. Either way, your client pays the same amount in respect of these fees regardless of the supplier's VAT status.
4.20 Mediation fees
Mediation is a well-established process for resolving disagreements. Fees charged by the mediator are a supply of services and as such the fee will be subject to VAT at the standard rate if the mediator is registered or registerable for VAT.
As the role of the mediator is to facilitate your client in reaching an agreement, the service is supplied to your client not you. Therefore, if you pay the mediator on your client's behalf then this can be treated as a disbursement for VAT purposes. For the avoidance of any doubt or issues being raised on any subsequent VAT inspection, you may prefer to ask the mediator to invoice your client direct.
5 How to treat qualifying disbursements
If a payment qualifies as a disbursement, it may be treated in one of two ways:
5.1 Option A
The disbursement can be passed on to your client as a VAT-inclusive amount (if taxable) and excluded when calculating any VAT due on the main supply of legal services to your client. If this treatment is adopted, you cannot reclaim the input tax on the supply as no goods or services have been supplied to you. Unless the VAT invoice for the disbursement is addressed directly to your client, your client is also prevented from reclaiming input tax as he does not hold a valid VAT invoice.
Generally it is only advantageous to treat a disbursement in this way if no VAT has been charged on the supply by the third party or your client is not entitled to reclaim the VAT.
The following example, based on those given in the HMRC's VAT Guide (Notice 700), illustrate the rules and the invoicing procedure:
You supply standard-rated legal services to your client for a basic fee of £800. In addition, you incur £200 expenses which you pass on to your client, but which do not qualify for treatment as disbursements for VAT purposes. You also pay £120.00 on behalf of your client in circumstances where that payment can be treated as a disbursement.
You must issue a VAT invoice to your client, showing:
|Legal Services ||£ 800.00 || |
|Expenses ||£ 200.00 || |
|Value for VAT || ||£1000.00 |
| || || |
|20 per cent VAT || ||£ 200.00 |
|Disbursements || ||£ 120.00 |
| || || |
|Total Billed || ||£1320.00 |
If you do treat a payment as a disbursement in this way, you must keep evidence, such as an order form or a copy invoice, to enable you to show that you were entitled to exclude the payment from the value of your supply to your client. If VAT had been charged by the third party, you must also be able to show that you did not reclaim input tax in relation to that supply.
5.2 Option B
Alternatively, services can be treated as supplied to and by you under section 47(3) VAT Act 1994. You may then reclaim the related input tax, subject to the normal rules, and must charge VAT on the onward supply, if appropriate. If you supply goods as an agent and issue an invoice in your own name, you must account for VAT as though you were the seller (section 47(2A)).
Using the same scenario and figures as in the example under option A and assuming the rate of VAT is 20 per cent, you claim input tax of £20 in respect of the disbursement of £120.00. You then charge VAT on the net amount of £100 which is itemised on your bill. The total amount your client pays is the same as that charged to you and is the same as the amount that your client would pay using Option A but the different accounting treatment enables him to reclaim the input tax.
You must issue a VAT invoice to your client, showing:
|Legal Services ||£ 800.00 || |
|Expenses ||£ 200.00 || |
|Value for VAT || ||£1000.00 |
| || || |
|Disbursements || ||£ 100.00 |
|20 per cent VAT || ||£ 220.00 |
| || || |
|Total Billed || ||£1320.00 |
6 Counsel's fees: concessionary treatment
A concessionary treatment for counsel's fees paid into and kept in client account was agreed between HMCE, the Bar Council and the Law Society at the time VAT was first introduced (this was published in the Gazette on 4th April 1973).
There are two ways in which you may treat counsel's fees:
6.1 Method (i)
You may treat the fee as your own expense and thus reclaim the VAT element as input tax. When you deliver your own bill of costs to your client, the value of the supply for VAT purposes is the value of your own costs, plus the tax exclusive value of counsel's fees.
Assume your professional charges are £1,200 plus £240 VAT (assuming a rate of 20 per cent), and the bill includes unpaid counsel's fees of £800, plus £160 VAT. The £160 VAT on counsel's fee note is treated as your input tax and can be reclaimed by you from HMRC. Your bill should show:
|Legal Services ||£1200.00 || |
|Counsel's fees ||£ 800.00 || |
| || ||£2,000.00 |
|VAT @ 20 per cent || ||£ 400.00 |
|Total || ||£2,400.00 |
When payment of £2,400 is received, the Solicitors Accounts Rules provide that the sum may either:
- be paid into an office account at a bank or building society in England and Wales; by the end of the second working day following receipt, the amount due to counsel of £960 (£800 plus VAT of £160) must either be paid out of office account or be transferred to client account pending payment; or
- be split between client account and office account as appropriate, or be paid into client account with a transfer out of client account of office monies (£1,200 costs and £400 VAT) within 14 days of receipt.
The accounts Rules 19(1)(b) and 20 - the option in rule 19(1)(b) may be used only if the payment includes no client money other than professional disbursements incurred but not yet paid.
Because counsel's fee is being treated for VAT purposes as an expense of the solicitor and the VAT element is being reclaimed by you, payment, when it is made, must be from the office account, so that the appropriate entry can be made in the VAT ledger account. At that stage the sum held in client account can be transferred to the office account.
6.2 Method (ii)
You may treat counsel's advice as supplied directly to your client and the settlement of the fees as a disbursement for VAT purposes. Counsel's VAT invoice (receipted fee note) may be amended by
- inserting on the fee note your client's name and the word 'per' immediately preceding your own name and address;or
- crossing out your name and address and replacing it with the name and address of your client.
The fee note from counsel will then be recognised as a valid VAT invoice in the hands of your client (who can reclaim the VAT if registered) and no VAT record need be kept in your accounts ledgers. You should keep a photocopy of the VAT invoice.
Where you consider that the services of counsel, if supplied directly to the client, would be outside the scope of UK VAT, you must not certify counsel's fee note to this effect and pay counsel only the fee net of VAT. You may advise counsel that VAT is not due on their services because of the place of belonging of the client. You may provide them with appropriate commercial evidence of the client's place of belonging.
Where the client is in business in other EU Member States, this evidence could be the client's EU VAT registration number, but if no EU VAT number is provided and the client is in business in the EU, counsel should obtain commercial evidence to this effect. A statement from you that the client is in business would not be sufficient. Where the client belongs outside the EU and Isle of Man , Counsel should obtain commercial evidence to confirm the place of belonging. Where no evidence of belonging is obtained, counsel should charge VAT on their services.
Assuming the same level of professional charges and counsel's fees as above, your bill should show:
|Legal Services ||£1200.00 || |
|VAT @ 20 per cent ||£ 240.00 || |
| || ||£1,440.00 |
|Counsel's fees (Inc VAT) || ||£ 960.00 |
|Total || ||£ 2,400.00 |
If the intention is to take advantage of the concessionary treatment and treat the supply as being made direct to your client, payment of counsel's fees must not be made from office account. The option in rule 19(1)(b) of paying into the office account, and then either paying counsel or transferring the amount due to the client account pending payment, cannot therefore be used.
When payment is received from your client, the cheque must either be split as to £1,440 office account and £960 client account, or alternatively the entire sum of £2,400 must be paid into the client account with a transfer out of the office monies within 14 days of receipt.
6.3 Tax point for Counsel's fees
Normally, the tax point for Counsel's services will be determined by payment and not delivery of a fee note. On payment, Counsel's clerk will add the VAT number of Counsel and other particulars required under Regulation 13 of the VAT Regulations 1995 to constitute a document as a VAT invoice so that the receipted fee note is a VAT invoice. This will usually be made out to you/your firm, so that you can claim input tax credit. However, if you alter the fee note so that it is addressed to your client, and input tax credit can be taken by your client, you should keep a photocopy of the VAT invoice, passing the original amended receipted fee note to your client. This is in case the fee note needs to be dealt with on an assessment of costs.
7 Non-qualifying payments or expenses
Expenditure incurred which enables you to provide services to your client cannot be treated as disbursements. This will include the n ormal costs incurred in performing a service as part of your business. 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.
In circumstances where you make a separate charge for costs incurred by you in the course of making your own supply of legal services to your client, the value of these must be included in the value of the supply when VAT is calculated on your bill.
If you incur a VAT charge in respect of any payment that does not qualify as a disbursement, the only consequence for VAT accounting is that you will need to record input VAT. The net amount is shown on your invoice to your client and output VAT is charged on that amount at the standard rate. Thjis means that your client pays the same amount as that paid by you to the third party.
Where no VAT has been charged, if the third party is not registered for VAT or if it was an exempt supply (for example bank charges) the fee is still treated as part of your services and you must add VAT at the standard rate to this cost on your invoice to the client.
You should note that where a third party expense does not qualify as a disbursement your client will pay the same amount in respect of that expense, regardless of the third party's or the supply's VAT status.
8 More information
8.1 Legal requirements
- Articles 73 and 79(c) of the 2006 VAT Directive, 2006/112/EC
- Value Added Tax Act 1994
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 020 7320 5675 from 09.00 to 17.00 on weekdays.
Visit the Practice Advice Service website.
8.2.2 Law Society publications
8.2.3 Law Society practice notes
8.2.5 HMRC Guidance
The Society acknowledges the contributions of members of the VAT & Duties Sub-committee in developing this practice note.
This practice note has been extensively amended from the version previously published on 19 February 2009, with clarifications in sections 1-3, and additional examples provided throughout.
9 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.
HMRC - HM Revenue and Customs
HMCE - HM Customs & Excise, the predecessor to HMRC on VAT issues