Do Solicitors Pay VAT on Disbursements

Solicitors regularly incur costs on behalf of clients, such as court fees, search fees, or expert reports. Some of these costs are classed as disbursements, which are paid to a third party and passed to the client without VAT. Others are recharges, where the solicitor pays for a service as part of their own supply to the client and must charge VAT when billing the client.

Understanding the difference is crucial. Getting it wrong can lead to HMRC disputes, VAT underpayments, or overcharging clients.

What is a disbursement

A disbursement is a payment that a solicitor makes to a third party on behalf of a client, where the cost belongs directly to the client rather than to the solicitor’s own business.

The key principle is that the solicitor acts as an agent for the client when making the payment. The client, not the solicitor, receives the supply from the third party.

Common examples of disbursements include:

Court fees and Land Registry fees.

Stamp duty or similar government charges.

Medical reports paid for on behalf of a personal injury claimant.

Counsels’ fees if counsel bills the client directly through the solicitor.

When a payment qualifies as a disbursement, no VAT is charged on it when it is re-invoiced to the client.

What is not a disbursement

If the solicitor benefits from the goods or services or uses them in delivering their own legal services, the cost is not a disbursement. Instead, it is part of the solicitor’s own supply, and VAT must be charged when invoicing the client.

These costs are often referred to as recharges or expenses rather than disbursements.

Examples include:

Photocopying, printing, or postage costs.

Travel and accommodation expenses.

Legal research tools or online database subscriptions.

Fees paid to third parties for services that form part of the solicitor’s advice.

In these cases, the solicitor is the customer receiving the service and must charge VAT when passing the cost to the client.

HMRC’s criteria for a disbursement

HMRC sets out strict conditions that must be met for a payment to qualify as a disbursement for VAT purposes. All the following must apply:

The solicitor acted as an agent for the client when paying the third party.

The client received and used the goods or services directly.

The client was responsible for paying the third party.

The solicitor made it clear that they were acting on behalf of the client.

The client authorised the solicitor to make the payment.

The costs were separately itemised on the solicitor’s invoice.

The solicitor passed on the exact cost without adding any markup.

The payment is one that would have been subject to VAT if the client had paid it directly.

If any of these conditions are not met, HMRC will treat the payment as part of the solicitor’s supply, meaning VAT should be charged.

Example

A solicitor pays a £300 Land Registry fee on behalf of a client buying a property. The fee is a government charge that the client would have paid directly if acting without a solicitor. The solicitor meets all HMRC’s criteria, so it is treated as a disbursement and no VAT is charged when it is passed on to the client.

By contrast, if the solicitor pays a courier £50 to deliver legal documents, the courier’s service is used by the solicitor, not the client. Therefore, the solicitor must charge VAT when billing the client for the delivery cost.

How to invoice disbursements correctly

To avoid confusion, solicitors should separate disbursements from recharges on client invoices. A clear breakdown should show:

Fees for legal services (with VAT applied).

True disbursements (with no VAT added).

Recharges or expenses that include VAT.

If a disbursement includes VAT charged by the third party, the solicitor should not reclaim it as input VAT unless it relates to their own business. Instead, the full cost, including VAT, is passed on to the client.

Example

A medical expert charges £600 plus £120 VAT for a report in a personal injury case. The solicitor pays the full £720 to the expert and recharges the same amount to the client as a disbursement. The solicitor cannot reclaim the £120 VAT because it belongs to the client’s expense, not the solicitor’s own business.

Disbursements and Making Tax Digital

Under Making Tax Digital (MTD), solicitors must record disbursements correctly in their accounting software. Disbursements should not be included in VAT return totals, as no VAT is charged or reclaimed.

Recharges and expenses that form part of the solicitor’s supply, however, must be included in VAT calculations and recorded digitally.

Risks of misclassifying disbursements

Misclassifying expenses can have serious tax consequences. If a solicitor incorrectly treats a recharge as a disbursement and fails to charge VAT, HMRC may assess the business for underpaid VAT and apply penalties or interest.

To avoid errors:

Review each expense carefully to determine who received the supply.

Keep evidence showing when you acted as the client’s agent.

Clearly label disbursements and VATable expenses separately on invoices.

Train accounts staff on the correct VAT treatment.

Common disbursement scenarios

Property transactions

Disbursements such as Land Registry fees, search fees, and Stamp Duty Land Tax are usually outside the scope of VAT. Photocopying and postage, however, are part of the solicitor’s own supply and subject to VAT.

Litigation and personal injury

Court fees and barristers’ fees billed to the client through the solicitor are generally disbursements. Costs like expert witness fees may qualify if the report is obtained specifically for the client’s use.

Corporate and commercial work

Company registration fees, notarial charges, and government filing fees are typically disbursements. Legal research subscriptions or due diligence reports purchased by the solicitor are not.

Record keeping for VAT on disbursements

Solicitors must keep clear records showing:

The third-party invoice or receipt.

Client authorisation to pay the third party.

Proof of payment.

How the cost was presented on the client’s invoice.

Records should demonstrate that the client was the recipient of the supply, not the solicitor. HMRC can inspect these records during a compliance check.

Example scenario

A law firm acts for a client purchasing commercial property. The solicitor pays £500 in Land Registry fees and £1,200 in search fees on behalf of the client. These are treated as disbursements with no VAT.

The firm also pays £300 to a surveyor for a valuation used in their legal report. Because the report benefits the solicitor’s advice, not the client directly, the £300 is treated as part of the solicitor’s supply, and VAT is charged when invoicing the client.

Conclusion

Solicitors only avoid charging VAT on true disbursements where they act purely as an agent for the client and the cost belongs directly to the client. If the solicitor uses the goods or services as part of delivering their own work, VAT must be applied when recharging the cost.

The safest approach is to apply HMRC’s eight-point test to every third-party payment and keep clear documentation. Correct classification ensures compliance, avoids penalties, and provides transparency for both HMRC and clients. For complex or high-value cases, consulting a VAT specialist can provide extra reassurance that your firm’s billing practices are fully compliant.