What is the difference between disbursements and recharges?

Solicitors regularly incur costs on behalf of their clients, such as court fees, expert reports, and travel expenses. Understanding whether these are disbursements or recharges is crucial for correct VAT treatment and accounting. Confusing the two can lead to compliance errors with HMRC or misreporting under the Solicitors Regulation Authority (SRA) Accounts Rules. This article explains the difference between disbursements and recharges, how each should be recorded, and how accountants help solicitors manage them properly.

In legal accounting, the terms disbursement and recharge are often used interchangeably, but they have distinct meanings. The distinction affects how solicitors charge clients, apply VAT, and maintain compliance with both HMRC and SRA requirements.

What are disbursements?

A disbursement is a payment a solicitor makes to a third party on behalf of a client. The solicitor simply acts as an intermediary, passing the cost directly from the third party to the client. Because the solicitor is not using the goods or services themselves, the payment does not form part of the solicitor’s own supply of legal services.

Common examples include:

  • Court or tribunal fees.

  • Land Registry search fees.

  • Barrister or expert witness fees paid on the client’s behalf.

  • Medical or valuation reports requested for a client.

Disbursements must meet strict criteria to qualify under VAT rules. HMRC’s definition requires that:

  1. The solicitor paid the cost on behalf of the client.

  2. The client received the benefit directly from the third party.

  3. The solicitor acted purely as an agent, not as the consumer.

  4. The client authorised the solicitor to make the payment.

  5. The solicitor passes on the exact cost without adding profit.

If all these conditions are met, the payment is classed as a disbursement and is excluded from the solicitor’s VAT calculation. This means VAT is not added to the amount when it is billed to the client.

Example of a disbursement

A solicitor pays £300 in court fees to issue a claim on behalf of a client. The solicitor includes this £300 on the client’s bill as a separate line marked “Court fee (disbursement)” and does not add VAT. The payment simply passes through the solicitor’s books and does not form part of taxable turnover.

What are recharges?

A recharge refers to costs that are part of the solicitor’s own business expenses but are passed on to the client. These costs are incurred by the firm in delivering its service, meaning the solicitor is the end consumer. As a result, they form part of the solicitor’s taxable supply and attract VAT.

Recharges include items such as:

  • Travel, accommodation, or subsistence expenses for client meetings.

  • Photocopying, printing, and postage costs.

  • File retrieval or storage charges.

  • Courier services used to deliver client documents.

Even though these expenses may be necessary for the case, they do not qualify as disbursements because the solicitor benefits from them in providing legal services. Therefore, they must be billed with VAT.

Example of a recharge

A solicitor takes a train to attend a client’s hearing and spends £80 on travel. When invoicing the client, the solicitor includes the £80 as an expense plus VAT, since the travel cost is part of the solicitor’s service delivery.

Key differences between disbursements and recharges

The distinction lies in who receives the supply and who benefits from it.

Aspect Disbursement Recharge

Who receives the supply The client The solicitor

Purpose Paid to a third party for the client’s Incurred by the solicitor as part of

direct benefit providing legal services

VAT treatment No VAT charged to the client (if all HMRC VAT must be added to the client invoice

conditions met)

Example Court fees, expert reports, search fees Travel costs, photocopying, courier fees

In short, disbursements are payments made as an agent, while recharges are costs passed on as part of your own service.

VAT implications for solicitors

The VAT treatment of disbursements and recharges is one of the most common areas of confusion for law firms. Incorrect classification can lead to VAT being undercharged or overcharged, potentially triggering HMRC queries or penalties.

Disbursements and VAT

Disbursements do not attract VAT as long as they meet HMRC’s conditions. However, if the solicitor adds an administration fee or markup, that portion becomes part of the firm’s taxable supply and VAT must be applied to the markup.

Recharges and VAT

All recharges are subject to VAT, even if the original cost was VAT-exempt. For example, if a solicitor recharges a postage fee to a client, they must apply VAT to that recharge because it forms part of their legal service.

Solicitors must ensure their invoices clearly distinguish between disbursements and recharges so that VAT is applied correctly.

Common mistakes firms make

Many law firms unintentionally misclassify costs, particularly when handling mixed transactions. Some of the most frequent errors include:

  • Treating all client-related payments as disbursements.

  • Failing to apply VAT to travel or courier costs.

  • Including disbursements within the firm’s taxable turnover.

  • Recording disbursements incorrectly in client ledgers.

These mistakes can distort both VAT returns and SRA compliance records, making it essential for firms to have proper guidance from accountants familiar with legal sector rules.

How accountants help solicitors manage disbursements and recharges

Accountants play a crucial role in helping solicitors handle these transactions correctly. Their support includes:

  • Reviewing invoices and expense policies to ensure correct VAT treatment.

  • Setting up accounting systems that separate disbursements and recharges automatically.

  • Training staff on when to apply VAT.

  • Ensuring disbursements are recorded in client ledgers and not treated as firm income.

  • Assisting with reconciliations and compliance reviews under the SRA Accounts Rules.

With accurate classification and recording, solicitors can maintain transparent billing practices, protect client money, and avoid HMRC scrutiny.

Example in practice

A law firm routinely charged VAT on all costs, including court fees and medical report charges. After an accountant reviewed their billing process, it was found that these items qualified as disbursements. The firm stopped charging VAT on them and adjusted its accounting software to flag disbursement payments separately.

The change not only improved compliance but also increased client confidence in the firm’s billing transparency.

Why the distinction matters

The difference between disbursements and recharges is more than an accounting technicality. It affects:

  • VAT reporting and liability.

  • SRA compliance and client money management.

  • Accuracy of financial statements.

  • Client trust and billing transparency.

Clear separation ensures solicitors charge fairly, stay compliant, and maintain accurate financial records.

Conclusion

Disbursements are payments made to third parties on behalf of clients, while recharges are expenses incurred by solicitors in delivering their service. The key difference lies in who benefits from the cost and how VAT is applied.

By working with accountants who understand legal sector regulations, solicitors can ensure accurate classification, maintain compliance, and uphold financial integrity in every client transaction.