When solicitors prepare fee notes for clients, the VAT treatment of expenses they have incurred is not, in all probability, a matter high on the priority list. Yet failure to appreciate the difference between expenses and disbursements may result in clients receiving higher bills than necessary. Moreover, if those clients are private individuals, businesses or organisations which are unable to recover all or any of their VAT input tax, this is an unnecessary cost for them.
For VAT purposes, the distinction between expenses and disbursements is this: an expense is a cost paid by a solicitor – a Land Registry search, for example – which is necessary as part of the provision of advice to a client. VAT is chargeable at 17.5 per cent. A disbursement, on the other hand, is a cost met by a solicitor on a client's behalf – such as stamp duty – which is payable on a contract made by the client but is not part of the provision of professional services. In this case, no VAT is chargeable.
Of course, there may be occasions when the difference is not self-evident. In order to qualify as a disbursement, a variety of conditions must be met. The most important of these are: the solicitor must have acted as the client's agent; the client must have received the goods or services and must ultimately be responsible for paying for them; the solicitor must itemise them separately on the invoice and recharge exactly the cost incurred; and the goods or services provided must be in addition to the solicitor's services provided to the client.
Additionally, a solicitor must keep evidence to show that he was able to treat the expenses as disbursements for VAT purposes and so was not obliged to charge the tax. A copy of the invoice from the third party supplier addressed to the client or a goods delivery note would be satisfactory. The original invoice, together with the solicitor's own invoice, should be provided to the client to allow that client to recover the VAT if appropriate.
If a solicitor supplies legal services to clients who are not registered for VAT or who are unable to recover all the VAT they incur – for example, banks, insurance companies, property developers, charities or trade unions – it may well be advantageous to treat costs as disbursements wherever possible. It must be remembered that if an expense is treated as a disbursement, the solicitor will not be able to recover any of the VAT shown on the original invoice as the supply is made to the client and not to the law firm.
As always with VAT regulations, matters can often be more complicated than they appear and can have unforeseen consequences. Although the treatment of costs as disbursements may permit a useful reduction in VAT charged to clients, solicitors in any doubt about the nature of an expense should be sure to obtain expert advice.
Sharon Crush is senior VAT manager at H W Fisher & Co.