Get a disbursement wrong and you have usually undercharged VAT on something you have already billed, sometimes for years. The correction is yours, not your client's, and on a conveyancing department putting through hundreds of files a year the arithmetic is unpleasant.
The test is all-or-nothing. A payment is a genuine disbursement, outside the scope of VAT, only if every one of the eight conditions in VAT Notice 700, section 25.1.1 is met. Fail any one and the payment is part of the consideration for your own supply of legal services — a recharge — and VAT is due on the full amount, even if no VAT was charged to you.
VAT is a UK-wide tax, so unlike the SRA Accounts Rules this applies whether your firm is in England, Wales, Scotland or Northern Ireland.
Two of these do most of the damage. The second — the client actually received and used the supply — is the one that fails when your firm is the real consumer of what was bought. And the seventh — only the exact amount — is failed by any firm that adds a handling uplift to an outlay and still shows it below the VAT line.
Section 25.1.2 requires you to keep evidence, such as an order form or a copy invoice, showing that you were entitled to exclude the payment from the value of your own supply. It also requires that you have not reclaimed input tax on it. Reclaiming the input tax and then treating the same payment as a disbursement is internally contradictory, and it is exactly the pattern a VAT visit looks for. Pick one treatment per type of outlay and make the bookkeeping enforce it.
The layout is not cosmetic. Disbursements sit below the VAT line and no VAT is added to them. Recharges sit above the VAT line, forming part of the value of your own supply, and standard-rate VAT is charged on them even where the original cost carried no VAT at all.
A completion statement shows professional charges of £900, a Land Registry fee of £135, a CHAPS fee of £30 and a bundle of electronic searches of £260 used to produce the report on title.
The Land Registry fee is a disbursement and sits below the line. The CHAPS fee is not — the bank supplies the transfer service to the firm — so £30 goes above the line. The searches were used by the firm to advise, so £260 goes above the line too. Taxable supply £1,190, VAT at 20% is £238, and the bill totals £1,563 including the £135 disbursement. Treating the CHAPS fee and the searches as disbursements would have understated the VAT by £58 on this single file. Figures are illustrative.
Two of HMRC's worked examples in Notice 700 §25.1.3 are addressed directly at solicitors, and both say the same thing in different clothes: ask who received the supply.
The CHAPS point is easy to let slide, precisely because the fee is small and the treatment feels pedantic. It is also completely unambiguous in HMRC's published guidance, which is what makes it an easy assessment to raise.
HMRC's internal manual for solicitors, VTAXPER46000, sets out the working lists.
Accepted as disbursements:
Not accepted:
The pattern is consistent. A fee that a third party charges the client for something the client receives — the court's fee for issuing the client's claim, the Land Registry's fee for registering the client's title, the duty the client owes — is a disbursement. A cost the firm incurs in order to deliver its own service is not, however precisely it is passed on.
This is where firms are still working from out-of-date material.
In Brabners LLP [2017] UKFTT 0666 (TC 06093), the First-tier Tribunal held that electronic property search fees were not disbursements, because the firm used the search results in making its own supply of legal services to the client.
HMRC then published Revenue and Customs Brief 6 (2020) on 5 June 2020, announcing the withdrawal of the postal concession from 1 December 2020. The informal 1991 concession, under which postal search fees could be treated as disbursements, was described as having no basis in law and as inconsistent with Brabners.
The operative test HMRC now applies does not turn on how the search was obtained at all. It turns on what you do with the result:
In a normal residential conveyance the searches feed the report on title. That is using them to advise, and the fees belong above the VAT line.
VAT Notice 700 §25.1.3 Example 2 still contains a sentence saying that where a solicitor pays a fee for a postal search, this may be treated as a disbursement. That sentence was overtaken by Revenue and Customs Brief 6 (2020) with effect from 1 December 2020 and has never been removed from the Notice. Work to the Brief. If someone in the firm produces the Notice as authority for treating postal searches as disbursements, this is why it is stale.
The decision is easiest to control at the point the outlay is coded, not at the point the bill is drafted. Practical steps:
Two related points sit next to this on the same bill. Money received on account of costs is client money under Rule 2.1(d) of the SRA Accounts Rules until a bill is delivered, and Rule 4.3 requires a bill or other written notification of costs before any transfer to office for the specific sum billed. Our Accounts Rules guide covers both. And VAT registration itself follows the same £90,000 threshold as any other business: register within 30 days of the end of the month in which rolling 12-month taxable turnover exceeded £90,000, with effect from the first day of the second month after the breach.
We set the outlay schedule up once with your cashiers, code disbursements and recharges separately in the ledger, and check the treatment against the bills each quarter so a wrong assumption is caught in months rather than years. It sits alongside the VAT returns and the client account work in our accounts and tax service, and links straight into the client account bookkeeping that keeps rule 4.3 evidenced. If you want to see how the whole compliance year fits together, start with the Accountant's Report guide.
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VAT Notice 700 section 25.1.1 sets out eight conditions, and all of them must be met. You acted as agent of your client when you paid the third party; your client actually received and used the goods or services; your client was responsible for paying the third party; your client authorised you to make the payment; your client knew a third party would provide the goods or services; your outlay is separately itemised on the invoice; you recover only the exact amount you paid; and the goods or services are clearly additional to the supplies you make on your own account. Fail any single one and the payment is a recharge forming part of your own supply, VATable in full.
No. HMRC's own worked example in VAT Notice 700 is explicit that the service for which the charge is made is supplied by the bank to the solicitor rather than to the client, so the fee when recharged, even at cost, forms part of the value of the solicitor's own supply of legal services and VAT is due on the full amount. HMRC's internal manual VTAXPER46000 lists telegraphic transfer fees among the items it does not accept as disbursements, alongside travel, accommodation, telephone and telex charges. The fee is small enough that firms treat the point as pedantic, which is precisely why it is an easy and common assessment for HMRC to raise across a whole conveyancing department.
Usually yes, on the modern test. Brabners LLP [2017] UKFTT 0666 held that electronic search fees were not disbursements because the firm used the results in making its own supply of legal services. Revenue and Customs Brief 6 (2020), published 5 June 2020, then withdrew the informal postal concession from 1 December 2020, describing it as having no basis in law. HMRC's operative test is what you do with the result: if it is passed to the client without comment or analysis it may be a disbursement, but if you use the information to advise the client or to produce a report on title it is a cost component of your own supply and VATable in full. In a normal conveyance the searches feed the report.
HMRC's manual VTAXPER46000 accepts court fees, land charge and Land Registry fees, probate fees, stamp duty, company incorporation fees, estate agents' commission, the fees of notaries, surveyors and witnesses, and charges for police and medical reports. It does not accept telegraphic transfer or CHAPS fees, travel and accommodation, or telephone and telex charges. The underlying pattern is consistent: where a third party charges the client for something the client receives, such as the court's fee for issuing the client's claim or the Land Registry's fee for registering the client's title, it is a disbursement. Where the firm incurs a cost in order to deliver its own service, it is not, however precisely it is passed on.
You have undercharged VAT on your own supply, and the liability is the firm's rather than the client's. Because billing treatments are usually applied consistently across a department, an error found on one file is normally an error on every comparable file, which is how a small point like a CHAPS fee becomes a material assessment. HMRC will also look for the contradiction in the other direction: section 25.1.2 requires you to hold evidence that you were entitled to exclude the payment and to show you have not reclaimed input tax on it, so an outlay where input tax was recovered and the bill shows a disbursement is wrong one way or the other. Fix the coding first, then quantify the exposure.
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