Update to disbursements and VAT guidance
The Law Society has published an updated guide to disbursements and VAT.
This is available on the Law Society website and is attached to this email as a pdf for reference.
This guidance has been anticipated since the Brabners LLP case decision that electronic property searches could not be treated as disbursements. This case affects VAT registered firms that provide services for clients that are not VAT registered where expenses are incurred on which VAT is not charged. Treating that expense as a disbursement for VAT passes the cost on to the client without VAT being added. Treating it as part of the overall service means that VAT is added. If the client cannot reclaim the VAT, an additional cost is incurred by the client.
Where the firm is not registered for VAT but has clients that are VAT registered, the issue is the opposite, namely that expenses where VAT is incurred are best treated as disbursements for VAT to allow the VAT registered client to reclaim the VAT.
The new guidance is not definitive and is in fact less detailed than previous guidance due to the unresolved uncertainties of the Brabners LLP case, but it does try to set out the current position and provide examples.
Unfortunately the guidance has not been agreed with HMRC and therefore is of limited use if HMRC queries your treatment of disbursements and VAT.
It is clear from reading the practical examples that firms are required to use their own judgement but will need to note that any argument from HMRC will be based on their success in the Brabners LLP case. The main argument in Brabners LLP was that the searches were used to provide advice as part of the solicitor's work and therefore the expenses incurred were not client disbursements for VAT but formed part of the cost of providing that advice.
The safe course of action will be to not treat expenses incurred on behalf of clients as disbursements for VAT without careful consideration of the stance HMRC may take in the event of a VAT inspection.
It is important to bear in mind that HMRC's VAT notice 700 (section 25) has not changed and is still the basis for HMRC's view on disbursements. This is included in the new Law Society guidance for reference.
We recommend you read the guidance carefully, in particular the practical examples, and review your own practices in light of this guidance because even though it is not binding on HMRC, it is the Law Society's view on current best practice.
Please do contact us if you would like to discuss your disbursements and VAT further.
VAT treatment of disbursements and expenses - The Law Society October 2019