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 to the client and VAT must be calculated on the total cost 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 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 to treat a transaction as a disbursement for VAT purposes, there are specific conditions that must be satisfied which can be found in more details from HMRCs 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 determining where the supply takes place. The place of supply of legal services is determined by the status and location of the customer.
If the client belongs outside the EU, or belongs in another EU member state and receives the services for the purposes of their business, the supply is where the client belongs and is outside the scope of UK VAT.
If the client belongs in another EU member state and receives the supply in a non-business capacity, or if the client belongs in the UK, the supply is deemed to take place in the UK and VAT must be charged.
Where services are supplied in relation to land, the place of supply is where the land is situated regardless of where the customer belongs.
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 a complex area so be sure you review your position regularly so that you remain compliant and avoid an unnecessary headaches.