VAT treatment of recharges and disbursements
It is important to be aware that the VAT treatment of recharges and disbursements is different. It can be confusing, so here’s how to tell the difference.
Most professional firms will incur costs in delivering services to a client, for example, travel and subsistence. These services have been supplied by a third party to the firm and allow it to provide its professional services to its client. The third party has not supplied any services directly to the client. Therefore, such costs will form part of the value of the supply of professional services to the client and VAT must be calculated on the total fee including any recharged costs. This should happen regardless of the VAT liability of the cost incurred by the firm. Therefore if a zero-rated train ticket (for example) is recharged to a client, it will merely form part of the fee charged for the services. The firm is not making a zero-rated supply of travel to its client; it is simply recharging its costs of delivering its standard rated service. If this is recharged incorrectly as a ‘disbursement’ and treated as zero rated, there will be an under declaration of VAT due.
Disbursements are made when a firm incurs a cost on behalf of a client where the supply in question is contractually made by the third party to the client, but the firm settles the bill and then is reimbursed by the client. Effectively the firm has acted as the client’s agent in settling the liability. An example of this is solicitors paying stamp duty on behalf of a client, or search fees via the land registry for issues around property.
In order for a transaction to be a disbursement for VAT purposes, there are specific conditions that must be met and these are set out in HMRC's guidance.
Determining the place of supply
The place of supply will determine whether VAT must be charged on a particular service and therefore it is necessary to consider the rules for identifying where the supply takes place. The place of supply of legal services is determined by the place where both the supplier and the customer are established.
Since 1 January 2021, if the customer belongs outside the UK, the place of supply is where the customer belongs and the supply is outside the scope of UK VAT. This is regardless of whether the customer is an individual or a business.
It should be noted that some overseas countries apply ‘use and enjoyment’ rules to specific services supplied to individuals and hence it is necessary to consider whether there is an obligation to register in the customers country on a case by case basis.
Where the customer is a business, it is likely there will be a reverse charge by the customer and hence no requirement to register overseas
Where services are supplied in relation to land, the place of supply is where the land is situated regardless of where the customer belongs. If the land is situated in the UK , VAT will apply. If the land is situated overseas, there may be an obligation to register for VAT overseas depending on the rules for that jurisdiction.
Tax points – extension to the normal rules
Ordinarily a business has 14 days in which to raise a tax invoice once it has completed it services. The procedure for drawing up solicitor’s bills is such that most solicitors are unable to issue an invoice within 14 days after the date of completion of their services.
The following general extension has been granted by HMRC to all VAT registered solicitors:
- If the consideration for a supply of services by a solicitor is not ascertained, or ascertainable at or before the time when the services are performed, the supply may be treated as taking place at the time when the solicitor issues a VAT invoice in respect of it provided that the VAT invoice is issued not later than three months after the date of performance of the services.
It is important to remember that failure to issue a VAT invoice means that the tax point reverts to the basic tax point rather than the end of the three month period and hence solicitors must ensure they have accounting systems in place to monitor this.
The issues around VAT and law firms can be complex and hence the VAT accounting processes should be kept under regular review to ensure compliance and that any changes to the rules are correctly implemented. A prime example of this has being the changes to the place of supply rules since 1 January 2021.