The key point, of course, is that if a payment is a disbursement for VAT purposes then it means you do not add VAT to the disbursement when you bill the client. That will save money for any clients not registered for VAT (or who cannot reclaim VAT). Needless to say, because of this solicitors are often keen to allocate payments as disbursements, rather than profit cost. 



The reason why VAT is not charged on disbursement is that the item is deemed to have been provided directly to the client (not to the solicitor). HMRC define a disbursement for VAT purposes as being a payment made to a third party, by a supplier on behalf of a client, as the client’s agent. It follows that any payments you make to third parties on behalf of a client can be treated as disbursements for VAT purposes (and accordingly no VAT charged). But, all the following criteria must be met: 


• you acted as agent of your client when you paid the third party;

• you charged your client the precise amount you paid out (ie no mark-up);

• the client authorised you to make the payment on their behalf; 

• the client knew the goods or services would be provided by a third party; 

• the client received and used the goods or services provided by a third party; 

• your client was responsible for paying the third party (eg SDLT);

• the item was separately itemised when you invoiced your client.




Costs that can be treated as disbursements would include medical fees, reports, records, expert opinions, expert services such as an interpreter, and surveyors’ fees. As an example, an interpreter can be a disbursement if needed so the client can communicate with you; on the other hand, an invoice for a translator cannot be a disbursement if the translator was commissioned to help you understand a document and then advise the client (since the client did not directly receive the benefit of the supply). 



The bottom line is that if an item is not a disbursement then you must charge VAT. This would include usual postal charges; costs such as your accounts administration overheads; business expenses such as travelling and subsistence costs, phone bills, and other office costs; TTs to or from your own professional account; royalty or licence fees incurred in providing goods or services to the client). 



As noted in this month’s Professional section, the SRA (as well as the VAT-man) is actively looking into incorrect charging of this sort. You have been warned! The Law Society Practice Note is at www.lawsociety.org.