Disbursements for VAT purposes in the law profession

When you make payments on behalf of your customers, for goods or services received and used by them, you might be able to treat these payments as ‘disbursements’ for VAT purposes. This means that you:

• don’t charge VAT on them when you invoice your customer
• can’t claim back any VAT on them

(https://www.gov.uk/guidance/vat-costs-or-disbursements-passed-to-customers)

The Law Society has issued new guidance to help law firms decide whether items such as property search fees may be treated as disbursements for VAT purposes. Recent case law (such as Brabners LLP and British Airways v J Prosser) has interpreted the concept of disbursements narrowly, and the Law Society’s guidance considers what this means for the law profession.

In the Brabners case, the First Tier Tax Tribunal (FTT) ruled that local authority charges for electronic property searches shouldn’t be treated as a disbursement because they were supplied to Brabners as part of its own overall supply of legal services; a common scenario for legal practices.

For VAT purposes, a registered business must charge VAT on all payments it receives in return for the supply of services to its customers. FTT decisions are only binding on the parties concerned but can be used as indicative evidence in other appeals. It’s also worth noting that HMRC haven’t issued any guidance, or changed any existing publications post-Brabners.

Statutory charges, such as search fees, are considered to be outside of the scope of VAT. This means that no VAT is incurred by the practice when incurring the cost but, following principles from the Brabners case, the practice must charge VAT when passing the cost on to clients as part of the overall charge for services.

The more recent British Airways v Prosser Court of Appeal (in this instance, specifically non-binding) decision also supports this interpretation of when disbursement treatment is available. The cases contradict the traditional VAT treatment of search fees, so firms must take action to make sure they don’t fall foul of HMRC in the future.

The perceived lack of clarity in these decisions can be frustrating. These cases appear to suggest that firms should take a conservative approach when treating items as disbursements going forward. Where VAT is concerned, individual practices should get professional advice on how published guidance and legislation applies in their specific circumstances.

As a rule of thumb, a cost for which you seek reimbursement from a client can only be a disbursement for VAT purposes if the services aren’t used in the making of your overall supply of services.

The payment of court fees, probate fees, taxes (e.g. stamp duty) etc. on behalf of clients are all good examples of this. The key question is whether the reimbursement forms part of the payment for the service supplied by a practice to its client. This new Law Society guidance implies that VAT should be charged where a cost, which may appear as if it has simply been met on behalf of a client, is used in any way to provide a service to that client. Again, please seek professional advice if the position is unclear.

Need help?

Please contact our VAT team on 0330 024 0888 or email enquiry@larking-gowen.co.uk.