Can I charge VAT on disbursements?

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Can I charge VAT on disbursements?

Many Solicitors will refer to any charges that go over and above the basic fee for their services to the client as a ‘disbursement’. Expenses paid out on behalf of the client to a third party, for example. However, the term is loosely used for a broad range of charges that may not actually qualify as ‘disbursements’ when it comes to VAT treatment. 

To understand how VAT applies, a distinction needs to be made between:

  • Costs incurred by solicitors in the course of  delivering their own service to clients – These recharged costs are subject to standard rated VAT; and 
  • Costs incurred by solicitors where they’re acting as an agent of the client – These costs qualify as disbursements for VAT purposes and VAT does not need to be added when the cost is recharged to the client. VAT incurred on the initial payment of the disbursements can also not be claimed back.

As the VAT treatments are very different, it is important to determine whether such third party costs qualify as a disbursement or not. This issue has been further complicated by the Brabners Case (see below). As such, we have put this information together to assist Solicitors in determining the correct VAT treatment of costs recharged to clients.

Overall

HMRC advise that the following charges are usually eligible to be treated as disbursements by solicitors on behalf of their clients:

  • Statutory charges such as court fees, estate duty, incorporation fees, land charge, and land registry fees, probate fees and stamp duty.
  • Charges for the professional services of a third party such as estate agent fees, notaries, surveyors, or witnesses, and charges for police and medical reports.

The key is whether the service is being provided to the client and the solicitor has initially paid on behalf of the client for ease, or whether the supply is being made to the solicitor in order for the solicitor to be able to provide their own services to the client.

The Brabners Case 

In the case of Brabners Vs HMRC, the issue in question was whether or not electronic searches carried out in conveyancing should be classed as a disbursement. 

The tribunal found that the amount paid by the client in search fees was considered part of the overall fee for the service provided by the firm, and therefore, the fees for those searches could not be treated as disbursements for VAT purposes. 

HMRC and The Law Society have contradicting views about the correct VAT treatment of search fees paid by solicitors and passed onto the client.

Discussions between HMRC and The Law Society regarding the correct VAT treatment of property search fees are continuing. In the meantime, The Law Society has advised that firms may wish to follow HMRC’s guidance when deciding whether to charge VAT on fees for property-related searches going forward.

Summary of HMRC’s recommended VAT treatment:

  • Electronic property search fee passed onto the client without comment or analysis:
    • Treat as a disbursement.
    • Do not charge VAT.
  • Electronic property search fee passed onto the client but the firm uses the search to provide advice/produce a report for the client:
    • Not a disbursement.
    • Charge standard rated VAT at 20%.
  • Postal property search fee concession
    • Treat as a disbursement.
    • Do not charge VAT.
    • Historically by concession, HMRC are prepared to allow solicitors to treat postal search fees as disbursements, so that VAT will not be payable on the amount of the fee.
    • Please note that following the Brabners case, HMRC has acknowledged the need to review the position in respect of the postal search concession. Although it remains available currently, HMRC has ruled out any extension of it to electronic searches.

HMRC advise that this guidance also relates to personal searches. HMRC state that the fee for personal searches is charged for the supply of access to the official record, and it is the solicitor rather than the client who receives that service. The solicitor uses this information to advise the client and the recovery of the outlay is part of the overall value of the solicitor’s service to the client. Therefore, VAT should be re-charged at the standard rate.

Bank fees

Where a payment is made to the bank via the solicitors’ own business or client account for the transfer of funds (telegraphic transfer fees or CHAPS), the solicitor cannot treat the bank’s fee as a disbursement for VAT purposes. 

The service for which the charge is made is supplied by the bank to the solicitor, not the client. Although the bank’s supply may be exempt from VAT, the fee when re-charged, even though at cost, is part of the value of the solicitor’s own supply of legal services to the client, and VAT is due on the full amount.

Summary of VAT treatment:

  • Not a disbursement.
  • Charge standard rated VAT at 20%.

Advertising

There is no specific rule or mention in the VAT guidance on the treatment of re-charging advertisement costs. As such, we would recommend following the general VAT disbursement guidance i.e. if the advertisement forms part of the overall supply provided by the solicitor to the client then charge VAT. If the solicitor is acting as an agent and paying the advertising company on behalf of the client then it can be treated as a disbursement for VAT purposes

Travel and accommodation costs

Travel, accommodation and telephone charges incurred by a solicitor in the course of services to clients, and recovered from clients at cost, cannot be treated as a disbursement for VAT purposes. Such supplies are made to the solicitor and therefore form part of the onward supply of legal services to the client.

Summary of VAT treatment:

  • Not a disbursement.
  • Charge standard rated VAT at 20%. 

Unidentified disbursements

Ideally, all amounts recharged to clients should be identified and the correct VAT treatment applied. However, we understand that this may not always be the case. As such, due to the current controversy and uncertainty of the VAT treatment of disbursements, we recommend any unidentified disbursements be charged at the standard rate of VAT.

Other points to note

HMRC specifically states that the fact that a solicitor withdraws funds from a separate client account to make payments has no bearing on whether the re-charge qualifies as a disbursement for VAT purposes or not. If those funds are withdrawn to meet costs incurred by the solicitor for supplies made to him/her, the recharge cannot be treated as a disbursement for VAT purposes, even if it is made at cost.

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