When is a disbursement not a disbursement?

The question of what can and what cannot be a disbursement is one which often arises in the world of VAT. The SRA Accounts Rules define a disbursement as “any sum spent or to be spent by a solicitor on behalf of the client or trust”.

That definition seems to be fairly clear-cut. However, HM Revenue & Customs (‘HMRC’) have a very different definition. 

HMRC’s VAT Notice 700 states that: “You may treat a payment to a third party as a disbursement for VAT purposes if all of 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 and services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.”

So, what does this mean in practice?

The Barratt Goff & Tomlinson is a key case in this area. HMRC argued that medical reports obtained by the firm on behalf of their personal injury clients failed to meet the above criteria and were therefore not vat-able disbursements, and that VAT should have been passed on to the firm’s clients, even though the firm itself was not charged VAT by the suppliers.

HMRC’s argument was rejected by the Tax Tribunal Judge in the above case since the reports were passed to the client and could have been transferred to another advisor. In other words, the supply was to the client and not to the firm.

The Law Society’s view, as expressed in their VAT on disbursements practice note from 10 March 2011, is that the key issue is whether a payment is part of the consideration for the ‘service supplied by you’. The Law Society therefore recommends that:

  • your client should authorise you to obtain the service on their behalf
  • any reports are sent to your client either by you or the supplier (you can retain a copy)
  • the amount that you charge your client should be exactly the same as the amount charged to you by the supplier
  • the expense should be separately itemised on the invoice you send to your client; and
  • the supplier should be aware that the service is being provided to a third party – and you should inform the supplier the identity of your client.

The following is a summary of some of the recommendations made in the Law Society’s VAT on disbursement note – please refer to that note for further detail and explanation. This article is not intended to provide advice to cover specific situations and no liability can be accepted for action or refraining from action that you may take as a result.

Property searches - Only an issue where the supplier has not charged VAT. Treat as disbursement and do not charge VAT to your client, but only if a copy of the searches is given to your client. You should also tell your supplier the identity of your client and have them show their name/reference on the search form

Land registry fees - Treat as a disbursement and do not charge VAT to your client only if you recharge the exact fee

Local authority search fees - By concession HMRC agree to treat postal searches as disbursements and no VAT to be charged. The Law Society argue that electronic searches can also be treated this way if the VAT Notice 700 criteria (above) are met

Mining search fees - VAT will be included on the invoice to you. VAT element to be treated as Input VAT, the search amount to be treated as an expense and added to your bill on which VAT will be charged

Photocopying charges - Not a disbursement and VAT should be charged unless copying provided by an external agency

Travelling expenses - Not a disbursement and VAT should be charged

Telegraphic transfer fees - Not a disbursement and VAT should be charged

Telephone charges - Not a disbursement and VAT should be charged

Debit/credit card fees - Not a disbursement and VAT should be charged

Agency fees - VAT will usually be included on the invoice to you. VAT element to be treated as Input VAT, the search amount to be treated as an expense and added to your bill on which VAT will be charged

Court fees - These are not vat-able as the client is required to pay these fees to commence proceedings. Can be treated as a disbursement with no VAT charged.

Other situations are also covered by the Practice Note and medical reports are covered in particular in HMRC notice 701/57 ‘Health Professionals’. If you require any assistance with the correct treatment of disbursements, or with any other tax queries, please contact Andy Poole at andy.poole@armstrongwatson.co.uk.

If you like this article and would our FREE updates sent straight to your inbox then subscribe to our monthly newsletter

Subscribe

Get in touch

To find out more about how we can help you or your business, call us on 0808 144 5575 and speak to a member of our team. Alternatively use our contact form to send us a message or arrange a callback.

CALL 0808 144 5575

or

Contact Us

All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.

Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson Accountants, Business & Financial Advisers is a trading style of Armstrong Watson LLP. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities.

Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales No. 8800970. Registered office: 15 Victoria Place, Carlisle, CA1 1EW

Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales No. 7208672. Armstrong Watson Financial Planning & Wealth Management is a trading name of Armstrong Watson Financial Planning Limited. Registered Office: 15 Victoria Place, Carlisle, CA1 1EW