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VAT treatment of disbursements

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It is common practice for solicitors to request searches on behalf of their clients. The cost of the search is normally based on a scale of statutory charges which do not attract VAT and when solicitors pass this cost on to their clients they do so as a disbursement which is outside the scope of VAT.

HMRC will accept this practice provided all the disbursement criteria as published in the VAT Guide   (Notice 700) are met.

The criteria are as follows;

“You may treat a payment to a third party as a disbursement for VAT purposes if all the following conditions are met:

  • you acted as the agent of your client when you paid the third party
  • your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
  • your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client)
  • your client authorised you to make the payment on their behalf
  • your client knew that the goods or services you paid for would be provided by a third party
  • your outlay will be separately itemised when you invoice your client
  • you recover only the exact amount which you paid to the third party
  • the goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account

All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes”.

The First Tier Tribunal (FTT) were not convinced that Brabners, a firm of solicitors, met all the criteria even though they were supported by arguments advanced by The Law Society.

On the evidence produced to it the FTT formed the view that Brabners acted as a principal rather than an agent of their client when obtaining the searches.

Consequently, in the view of the FTT the searches failed the criteria to be regarded as a disbursement and the recharge therefore became a further charge to their clients for their conveyancing services.

It should be noted that this is a decision of the FTT and is only binding on the parties involved. However, solicitors should be aware of this case and may like to review their position in the light of this decision.

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