Surprisingly, this has been a common question during 2011. The Solicitors’ 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?
This all came to a head recently with the Barratt Gogh & Tomlinson case where 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 dated 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 dated 10 March 2011 – 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 only if a copy of the searches is given to your client.
- 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
- Not a disbursement and VAT should be 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.
Andy Poole is the Legal Sector Director at Armstrong Watson Chartered Accountants, head of the firm’s UK-wide legal sector team, specialising exclusively in advising solicitors and law firms.
