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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:
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:
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 email@example.com.
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