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Disbursements and VAT treatment

During the course of your transaction, in some cases we will send you a Completion Statement as well as an Invoice.  For those of you who are not new to the firm, upon perusal you will note that the format of our completion statements and invoices have changed, and now show VAT as chargeable on certain disbursement which were not previously subject to VAT.  Recent guidance provided by the Law Society will affect the way all law firms charge VAT on their disbursements and so it is not a issue unique to us in any way – it is purely a result of recent developments; as well as Law Society and HMRC guidance issued in certain cases that have appeared at the First Tier Tax Tribunal and Court of Appeal.

What counts as disbursement?

Broadly speaking any payment made to a third party in connection with the matter we are dealing with for you is classed as a disbursement.  The Solicitors Act 1974 refers to them as “costs payable in discharge of a liability properly incurred by him on behalf of the party to be charged with the bill”.

HMRC require a specific set of criteria to be satisfied for a payment to be treated as a non-VATable disbursement.

What is the new position?

The rules on what is a “disbursement” have not changed but the interpretation of the rules has been narrowed following the recent cases. Recently, all law firms were issued with new guidance from the Law Society that seeks to provide some real clarity.

We have now been advised to take a very narrow view on what is classed as a “disbursement”. Anything that can be deemed as being part of the services provided to you is now classed as a VATable disbursement.  This contrasts with a straightforward repayment of a third-party service supplied to the client.

Some key examples of changes which you may have noticed in our invoicing are as follows:-

How does this effect you?

If you are VAT registered and the services we provide to you are during the course of your business dealings, then, subject to your Accountant’s advice, you should be entitled to claim the VAT back through your VAT returns. Our invoices will detail those disbursements on which you have paid VAT and so it is simply a case of some paperwork and a cash-flow consideration.

If you are an individual not obtaining services in the course of business or are not VAT registered, unfortunately, the VAT will be an additional cost you.

Rest assured, if the third-party provider already charges VAT on its fees already, then you will not see any change in the total costs of those disbursement. For example, most property searches are already subject to VAT by the search provider and in those cases, the total cost will remain the same, but our presentation of the information on your completion statement and invoice will be different.

 

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