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VAT treatment of disbursements

AuthorsFern Bullock

4 min read

VAT treatment of disbursements

You may have noticed on your invoices that we have recently started charging VAT on certain payments that were not previously subject to VAT.

This is due to developments and guidance issued in certain cases that have appeared at the First Tier Tax Tribunal and Court of Appeal.

What is a disbursement?

Generally, a solicitor refers to a payment made to a third party in connection with the matter they are dealing with as a disbursement.  The Solicitors Act 1974 refers to them as “costs payable in discharge of a liability properly incurred by him on behalf of the party to be charged with the bill”.

HMRC require a specific set of criteria to be satisfied for a payment to be treated as a non-VATable disbursement.

What was the previous position?

Historically, law firms did not charge VAT in respect of payments made for electronic property searches, Land Registry priority searches and official copy documents from the Land Registry. It was previously a widely-held view that these fees met the conditions of a disbursement and were therefore not subject to VAT.

The law on the treatment of disbursements for VAT purposes has never been entirely clear and case law appears to have taken different views on different types of disbursements (often making the position more uncertain).

What is the new position?

The rules on what is a “disbursement” have not changed but the interpretation of the rules has been narrowed following the recent cases. All law firms have now been issued with new guidance from the Law Society that seeks to provide some much-needed clarity.

Law firms are now advised to take a very narrow view on what is classed as a “disbursement”. Anything that can be deemed as being part of the services supplied by us (as opposed to repayment of a third party service supplied to the client), cannot be a non-VATable disbursement.

Some key examples of changes which you may have noticed in our invoicing are as follows:-

How does this effect, you, our clients?

If you are acquiring our services in the course of business and you are VAT registered, then you will be entitled to claim the VAT back through your VAT returns. So it is simply a case of some paperwork and a cash-flow consideration.

If you are an individual not obtaining services in the course of business or are not VAT registered, unfortunately, the VAT will be an additional cost you will need to take into account.

If the third party provider charges VAT on its fees already, then you will not see any change in our treatment of those disbursement. For example, most property searches are already subject to VAT by the search provider and in those cases, our VAT treatment will not change.

HMRC has not offered any updated guidance on the treatment of disbursements since the recent decisions, so the Law Society provided its view to assist law firms in how to deal with disbursements for the time being until such clarity is provided by HMRC. The guidance provided by the Law Society will affect the way all law firms charge VAT on their disbursements and is not something which you will only see on invoices from Brabners.

If you have any queries on the way VAT has been charged on your invoices, please do let us know.