Guidance on VAT Disbursements

The Law Society has issued guidance around VAT treatment of disbursements and expenses following on from a decision made of the First-tier Tax Tribunal in Brabners LLP v The Commissioners for her Majesty’s Revenue and Customs (HMRC) (2017 UKFTT 0666) . 

Brabners LLP were treating the cost of property searches as disbursements and as a result were not charging VAT when these costs were billed to clients. HMRC assessed the firm for underpaid VAT, on the basis that the property searches did not qualify as disbursements.

Section 67 of the Solicitors Act 1974 refers to disbursements as: 

“costs payable in discharged of liability properly incurred by him on behalf of the party to be charged with the bill.”  

This can include court fees, medical and or expert reports and search fees in property transactions. 

In the case of Brabners LLP, HMRC argued that these searches were a cost component of providing the conveyancing on the basis that the firm had an obligation to provide sound legal analysis and comment on the searches commissioned.  It therefore formed part of their service and should be subject to VAT. 

HMRC have accepted that where a search is passed on without analysis or comment it can qualify as a disbursement. Postal Searches can also be treated as disbursements. 

HMRC state in their VAT Notice 700: 

“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.” 

The view from HMRC is that all of the conditions must be satisfied before a payment can be treated as a disbursement for VAT purposes. 

Following on from the Brabner tribunal and comments in the Court of Appeal in the case of British Airways v J.Prosser (2019 EWCA CIV 547), The Law Society foresaw some of the difficulties solicitors encounter in making determinations about VAT disbursements, following the change in case law that they produced some new guidance. 

Gary Richards, Chair of the VAT on Disbursements Working Group, said:  

“We acknowledge that this guidance might not be able to answer all the legitimate questions practitioners may have. However, it aims to set the context for the decisions that law firms must take on how they treat disbursements. 

“This guidance replaces our former practice note on VAT on disbursements. It offers less detailed guidance on specific areas of legal practice, due to the challenges resulting in these decisions. However, it provides some more detailed practical guidance on VAT and disbursements in a real estate context.”