Solicitors often incur costs on behalf of a client and charge these on in the form of disbursements. Disbursements arise when goods or services are supplied by a third party directly to the client. The solicitor normally acts as agent in respect of these supplies and makes payment on behalf of the client.
Examples include Land Registry fees, Stamp Duty, estate agent commission and the services of other professionals.
A solicitor will normally recover these costs by adding a charge for disbursements on his sales invoice, and these amounts will not be subject to VAT.
From a VAT perspective, it’s important to make sure that the costs shown as disbursements qualify as being free of VAT, as incorrect treatment could lead to additional VAT owing to HM Revenue & Customs (HMRC) as well as penalties and interest.
HMRC lists eight conditions which must all be fulfilled for a cost to be treated as a disbursement:
- the solicitor acted as an agent of his client when he paid the third party
- the client and not the agent used the goods and services supplied by the third party (in practice, this is usually the key condition)
- the client was responsible for paying the third party
- the agent was authorised by his client to pay the third party on his behalf
- the client knew that the goods or services were to be provided to him by a third party
- the solicitor’s outlay is separately itemised when he invoices the client
- the amount recovered from the client is exactly the same amount as paid to the third party
- the goods or services paid for by the solicitor are clearly additional to the solicitor’s own supplies
If any of the above do not apply then the solicitor must add VAT to the amounts charged to the client. Examples of payments which cannot be classed as disbursements are general expenses borne by the solicitor and/or their staff, such as travel, accommodation, stationery etc. These are expenses of the solicitor incurred in the course of providing their services. Search fees have also been under scrutiny, and in a recent case were found not to be disbursements.
Disbursements can be a very contentious area, and it’s crucial to correctly establish which party is supplying the services and to whom. If you have any queries on this topic then please contact the Larking Gowen VAT team on 0330 024 0888.