The Law Society have updated their guidance on VAT on disbursements and expenses as per the practice note below. We have tried to summarise this below, but please familiarise yourself with the practice note in full:
It will have an effect on the way that client bills should be presented and accounts payables are posted in relation to input VAT.
Essentially HMRC argue that VAT should be charged on some non vatable payments such as searches, as they should be treated as an expense for VAT purposes under some circumstances.
What is the difference between a disbursement and an expense?
Essentially a cost incurred by a Solicitor should be treated as either (1) an expense or (2) a disbursement. (1) An expense should always have VAT charged upon it and forms part of the solicitors service. (2) A disbursement may be passed on without charging output VAT and is a third party cost for the benefit of the client. A disbursement must meet a strict criteria as outlined by HMRC below.
The defining factor for determining whether a payment qualifies as a disbursement for VAT purposes is whether its reimbursement by the client is part of the consideration for the “service supplied by you”, or whether it is made for third-party services supplied to your client.
It is important to note that if you are not charged VAT by a supplier on an item or an expense it does not necessarily mean that you do not need to charge VAT to the client. The description given to a payment is not relevant for determining whether it can be treated as a disbursement for VAT purposes. The key question is whether the reimbursement forms part of the consideration for the “service supplied by you”.
When can a payment be treated as a disbursement for VAT purposes?
“You may treat a payment to a third party as a disbursement for VAT purposes if all 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 or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.”
HMRC’s view is that all the conditions set out above must be satisfied before a payment can be treated as a disbursement for VAT purposes.
- Broadly, HMRC takes the view that if the payment relates to services, such as a medical report, which are also used by you (i.e. to provide further advice) then this is an integral part of the provision of the legal services to your client and as such the cost cannot be treated as a disbursement for VAT purposes.
This view, specifically in relation to electronic property searches, is set out in full in HMRC’s internal manual VAT Taxable Person at 47000 which states:
- “…[for] online searches carried out by a solicitor: whether or not it is to be treated as a disbursement will depend on how the information is used. If it is passed on to the client without comment or analysis…, it may be treated as a disbursement. However, if the solicitor uses the information himself eg in providing advice, or a report… it will form part of the charges for his services and will be subject to VAT”.
VAT on search fees
HMRC is of the view that where a solicitor has used the search to provide further advice to the client, it is considered integral to the solicitor’s legal supply and therefore cannot be treated as a disbursement. This means that you will have to charge VAT when you charge this cost to the client. This increases the cost to the client where the search fees are not subject to VAT.
Where an administration fee is incurred in relation to search fees, this should be treated as an expense if recharged to a client as it forms part of the service supplied.
VAT on Land Registry fees
Land Registry fees can be broadly divided into three categories:
- fees for registration applications
- fees for carrying out searches
- fees for obtaining copy documents
The Land Registry does not charge VAT on its fees.
It is the Law Society view that it should ordinarily be possible for registration fees to be treated as a disbursement.
Local Land Charge Search fees
HMRC’s view is that fees for ‘local authority’ searches that you have used as part of your advice in a transaction are subject to VAT when you charge them to your client.
It is important to consider whether the solicitor has used or commented on a search, medical report, etc, which should therefore form part of the service provided – And be treated as an expense for VAT purposes, attracting VAT – Rather than as a disbursement.
As we are not involved in the majority of bill preparation, it is important for your solicitors to be aware of the above and charge the correct output rate of VAT on client billing and also ensure that the expense/disbursement is correctly displayed on the client bill. Please forward this onto solicitors within your team.
The information above and in the Law Society practice note is only guidance and it is upto each legal practice to interpret.
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