Disbursements and expenses: VAT and its application

By Quill.

The legal profession is no stranger to the complications of legal accounting rules. In the past few months, law firms UK wide have been getting to grips with revisions to existing accounts regulations. Now, with recent developments in case law, not least the judgment made in Brabners LLP v HMRC, treatment of VAT for disbursements and expenses has been brought into the spotlight.

Currently, practices of solicitors around client invoicing have a tendency to vary; it’s their prerogative under today’s less prescriptive regulatory regime. That’s because, as with many regulatory guidelines, there’s no definitive instruction and it’s open to interpretation.

And herein lies the problem. The Brabners ruling determined that costs – in this case, electronic property search fees – could not be treated as disbursements for VAT purposes. The challenge is understanding the judge’s reasoning and determining how it should be applied in real situations without any serious financial implications. On this front, Brabners acts as a stark warning, to the tune of £68,000.

Expenses such as these made to third parties, instead of being traditionally treated as disbursements, may now need to be considered part of the service being supplied by law firms only. In doing so, law firms should add output VAT to its supply when expenses are passed on to clients.

The Law Society has recently issued guidance on this matter, containing various examples, thereby replacing its earlier practice note. This can be found at www.lawsociety.org.uk/support-services/advice/articles/vat-treatment-of-disbursements-and-expenses. While of some practical usage, overall there’s much less detail than predecessor documentation as a lack of clarity still exists. Ultimately, it’s down to individual choice about how to apply the law and decide the VAT treatment, with changes to systems and processes documented accordingly.

Although we can’t advise in absolute terms, then, how to classify expenditure, we can provide direction on how to use our Interactive legal accounts software for tagging disbursements and expenses. By doing so, your clients can clearly see the categories of office payments made on their behalf.

Request our user guide for a walkthrough of the assigning process and subsequent posting onto client bills for costs recovery purposes. There are instructions for customising disbursement and expense types as per your unique requirements too. As part of this, you’ll add the relevant VAT code to each sub type which helps with consistent application of VAT throughout your business.

You need to activate Interactive’s disbursements and expenses functionality but there’s no charge to get set up. For activation, email us at support@quill.co.uk.