VAT on Disbursements
Introduction
From time to time, the issue of when a disbursement is subject to VAT is put to us by Firms we support. We therefore considered it appropriate to put together a quick reference guide.
If you are ever unclear about whether to charge VAT or not, or if your Client challenges you, it is always advisable to speak with your accountant for guidance. We do, however, hope the following helps as a checklist to confirm you are getting this right.
When to Charge VAT and When Not To
The overall requirement when deciding whether to add VAT to a disbursement is whether:
- The disbursements incurred were for your purposes or only for the Client’s, and the Firm only acted as an agent – This is a True Disbursement.
- For example, if you pay a court fee on behalf of your Client because the court fee is the responsibility of the Client, and you are not advising on it.
- You provided guidance (services) when considering the ‘output’ of the disbursement. (In effect, the service is for you so you can advise the Client) – This is classified as a Recharge.
- For example, you request searches on a property transaction and are required to review those searches and advise the Client before delivering the output to your Client.
HMRC advises that if it is the Client who buys and receives the goods, and you are acting as an agent only, VAT does not apply in the following circumstances:
- You paid the supplier on your customer’s behalf and acted as the agent of your customer
- Your customer received, used or had the benefit of the goods or services you paid for on their behalf
- It was your customer’s responsibility to pay for the goods or services, not yours
- You had permission from your customer to make the payment
- Your customer knew that the goods or services were from another supplier, not from you
- You show the costs separately on your invoice
- You pass on the exact amount of each cost to your customer when you invoice them
- The goods and services you paid for are in addition to the cost of your own services
HMRC further advises that Costs that your Firm incurs itself when supplying goods or services to customers are not disbursements for VAT. It’s you who buys the goods or services for use in your own business. Examples of this would be:
- A train ticket to visit your Client. If you recharge the cost of the ticket, you must charge VAT as the travel was for you, not the Client.
- A courier fee is charged to the Client, as this is a normal business cost and incurred by the Firm.
- A bank transfer fee is charged when transferring money to the Client, as it was a service provided to the Firm and not the Client.
It is also important to note that these rules apply regardless of whether the supplier of that service charges VAT or is exempt from charging VAT – such as a bank fee.
Also, remember that if you had to charge VAT on items you paid for because they were supplied to you and not to your Client, you can claim back any VAT you paid on them. The Client will also be able to reclaim the VAT on your invoice if they are VAT registered.
The Firm cannot reclaim the VAT if the goods or services were not for the Firm but for the Client. For the Client to be able to reclaim the VAT, they will need a VAT invoice in their name.
Summary
To summarise the position
- If you are providing advice relating to the cost incurred, you must charge VAT. For example, purchasing searches on a property transaction, reviewing those searches, and advising the Client.
- IF you purchase a service for the business and you seek to pass on the cost of that service (whether or not the service provider charges VAT – for example, the incurring of a taxi or bank fees, as this is for you and not the Client, VAT must be charged to the Client.
- You are simply passing on the cost of a service that has been obtained only for the benefit of your Client, and you provided no advice. – For example, a court fee (as long as it is not incorporated into the service delivery).
As an example, in a matter where a Firm provided legal services, travels to the Client and incurs a court fee:
- Legal Services – £2,500
- Travelling expenses – £300
- Amount on which VAT is due – £2,800
- VAT at 20% – £560
- Disbursements (No VAT)
- Court Fee – £150
- Total including VAT – £3510
Our Compliance Services
At Regulation & Compliance Office, we can offer a number of outsourced support solutions, including:
- Regulation & Compliance Service – Our Regulation and Compliance Service, Inc. Risk Management Assessment and AML Risk, provides a cost-effective but essential solution for law firms to ensure they achieve a compliant environment. We work with firms of all types, from sole practitioners through to partnerships, Limited Companies and ABSs. We recognise that it is essential to recognise how a firm implements compliance to tailor the solution to each firm’s working practices. This is why our service is completely bespoke to each firm we work with.
- Regulation & Compliance Outsource Guidance and Support Service – This service provides law firms with a cost-effective outsourced solution which sees the compliance managers of RACO take on the day-to-day guidance and support expected to be provided by COLPs, COFAs, Data Compliance Officers, MLROs and MLCOs. This addition to the Regulation and Compliance Service—including Risk Management and AML Risk—relieves the Compliance Officers from most of the day-to-day burden of keeping up with regulatory requirements and ensures staff have access to compliance and risk advice when they need it.
- MLR 2017 Regulation 21 Independent Audit – A review of the firm’s approach to regulation and compliance, including AML procedures, with the audit meeting the requirements of Regulation 21 of AML 2017. The output provides the firm with a written gap analysis and solutions to remedy any issues and ensure compliance.
Contact Us
To ask any questions about the Regulation and Compliance Office and how we can support your Law Firm, please call us on 0203 985 8550, complete the online enquiry form, or email us info@regulationandcomplianceoffice.co.uk
