What Is a VAT Disbursement for Solicitors?

A VAT disbursement is a payment made to a third party on a client’s behalf, where the client receives and uses the goods or services, and the law firm simply pays the cost as the client’s agent.

For solicitors, VAT disbursement treatment is often relevant when dealing with court fees, statutory fees, registration fees, medical reports, search fees and other costs incurred during legal work. However, not every third-party cost can be treated as a disbursement for VAT purposes.

The distinction matters. If a payment qualifies as a disbursement, it is normally outside the scope of VAT when recharged to the client. If it does not qualify, it is usually a recharge forming part of the law firm’s own services, and VAT may need to be charged.

The VAT People advises solicitors and law firms on VAT treatment, VAT on disbursements, HMRC assessments and dispute prevention. For advice on your firm’s VAT position, call 0161 477 6600 or complete our online contact form.

What does “disbursement” mean in the context of VAT?

For VAT purposes, a disbursement is not just any cost paid during a matter. It has a specific meaning.

A payment may be a disbursement for VAT purposes where:

• The law firm pays a third party on the client’s behalf
• The client authorised the payment
• The client receives, uses or benefits from the goods or services
• The client knew the goods or services came from another supplier
• The client was responsible for paying the third party cost
• The law firm acted as the client’s agent
• The cost is separately itemised on the client invoice
• The law firm passes on only the exact amount paid
• The cost is additional to the law firm’s own supply of legal services

HMRC’s guidance on costs or disbursements passed to customers confirms that all the relevant conditions must be met.

For solicitor-specific guidance, The Law Society’s VAT treatment of disbursements and expenses is also a useful reference point for law firms deciding whether third-party costs can be treated as disbursements for VAT purposes.

What is a disbursement for VAT purposes?

A disbursement for VAT purposes is a payment where the client, not the law firm, is the real recipient of the goods or services.

This is different from a cost the law firm incurs while providing legal services. If the cost is part of the solicitor’s own service, it is not a true VAT disbursement, even if it is shown separately on sales invoices.

For example, if a solicitor pays a court fee on the client’s behalf, and the liability is properly incurred by the client, that may be a disbursement. If the solicitor pays travel costs to attend a meeting, that is normally a cost of providing legal services and should be treated as a recharge, not a disbursement.

Do solicitors charge VAT on disbursements?

Solicitors should not charge VAT on disbursements where the payment is a genuine disbursement for VAT purposes.

However, if the cost is really part of the law firm’s own services, VAT should usually be charged in line with the VAT treatment of the main supply. For most UK solicitors, standard rated legal services are subject to VAT.

This means the label used on the invoice is not decisive. A law firm cannot make a cost outside the scope of VAT simply by calling it a disbursement. HMRC will look at what the payment is for, who received the services provided, and whether the solicitor acted as agent or principal.

What is the difference between a payment and a disbursement?

A payment is simply money paid out. A disbursement has a narrower VAT meaning.

For example, a law firm may make many payments during a matter, including office costs, search fees, counsel’s fees, postage, travel, court fees and medical reports. Some may qualify as disbursements for VAT purposes. Others may be part of the solicitor’s own supply of legal services.

The key question is whether the client received the relevant goods or services directly, or whether the law firm used them to provide its own services to the client.

What is the difference between a disbursement and a reimbursement?

A reimbursement is where a business recovers costs incurred from the client. A disbursement is where the business pays a third party as the client’s agent and passes on only the exact amount.

If the payment is a reimbursement or recharge, the law firm may need to charge VAT, even if the original supplier did not charge VAT. If the payment is a true VAT disbursement, the law firm does not charge VAT on that amount and cannot reclaim related input tax.

Are disbursements outside the scope of VAT?

A genuine VAT disbursement is outside the scope of VAT when passed on to the client.

However, this only applies where the HMRC conditions are met. If one condition fails, the cost may be treated as part of the law firm’s own supply. In that case, the amount should usually be included in the VAT calculation when the law firm invoices the client.

A valid VAT invoice and clear evidence are important. Solicitors should retain records showing why the payment was treated as a disbursement, including the client’s authority, the third-party invoice, and evidence that only the exact amount was recharged.

Are disbursements included in VAT turnover?

A true disbursement is normally excluded from VAT turnover because it is outside the scope of VAT.

Recharged expenses are different. If the law firm incurs the cost itself as part of providing legal services, the recharge is generally part of the firm’s taxable turnover. This can affect VAT reporting, VAT returns and the firm’s overall compliance position.

Where values are material, or where a firm has treated costs separately for several years, a VAT Health Check can help identify whether the VAT treatment is accurate.

Common solicitor VAT disbursement examples

Court fees

Court fees are commonly treated as disbursements where they are paid on the client’s behalf, the client is responsible for the fee, and the exact sum paid is passed on.

The law firm should show the court fee separately and retain evidence that the client authorised the payment.

Stamp Duty Land Tax

Stamp Duty Land Tax is usually the client’s liability. Where a solicitor pays it on the client’s behalf in a property transaction, this will often be treated as a disbursement rather than part of the solicitor’s service charge.

Companies House and registration fees

Companies House fees and other statutory fees may be disbursements where the client is responsible for the cost and the law firm acts as agent.

The key point is that the law firm must pass on only the exact amount and should not add a markup.

Medical reports and medical records

Medical reports can require careful analysis. If the client receives and uses the report, and the solicitor is acting as the client’s agent, disbursement treatment may be possible.

If the report is obtained and used by the solicitor as part of preparing advice or conducting litigation, HMRC may view the cost as part of the solicitor’s own services. The VAT treatment should be reviewed before assuming the payment is outside the scope.

Search fees and property searches

Search fees are a common risk area for solicitors and conveyancers.

The First-tier Tribunal decision in Brabners LLP v HMRC is central to the VAT treatment of electronic property searches. The tribunal found that the online search fees were not disbursements and that VAT should have been applied.

HMRC’s Revenue and Customs Brief 6 (2020) also confirmed the withdrawal of the former postal search concession from 1 December 2020.

As a result, solicitors should not assume that property searches can be treated as disbursements. Where the search results are used to advise the client, report on title or support the solicitor’s own supply of legal services, VAT may need to be charged on the recharge.

What should a solicitor show on the invoice?

Where a payment is treated as a disbursement, it should be separately itemised on the client invoice.

A solicitor’s invoice should make clear:

• The professional fees for legal services
• VAT on the law firm’s own services
• Any recharged expenses that are subject to VAT
• Any true disbursements outside the scope of VAT
• The exact amount paid to the third party

If a payment is treated as a disbursement, the law firm should not reclaim input VAT on that cost. Where the client is VAT registered, eligibility for VAT recovery usually sits with the client, provided they hold the necessary valid VAT invoice.

HMRC’s VAT guide, Notice 700 also explains the importance of retaining evidence where payments are excluded from the value of the supplier’s own supply as disbursements.

What happens if a law firm gets VAT on disbursements wrong?

Incorrect VAT disbursement treatment can lead to HMRC assessments, VAT return errors, interest and penalties.

The risk is highest where a law firm has treated costs as disbursements for several years without checking whether the HMRC conditions were met. Search fees, medical reports and other third-party costs should be reviewed carefully because the VAT treatment may depend on how the service is used.

Common issues include:

• Treating recharged expenses as disbursements
• Failing to charge VAT on costs forming part of legal services
• Reclaiming input tax on costs treated as disbursements
• Failing to keep evidence for VAT purposes
• Passing on more than the exact amount paid
• Treating search fees incorrectly after Brabners

The VAT People can review your current invoicing approach and help you correct the position before HMRC raises a challenge.

VAT disbursement rules for solicitors: practical checklist

Before treating a cost as a VAT disbursement, ask:

• Did the client authorise the cost?
• Was the supplier providing goods or services to the client?
• Was the client responsible for paying the cost?
• Did the client know the service came from a third party?
• Did the law firm act as the client’s agent?
• Is the cost additional to the solicitor’s own services?
• Has the law firm passed on only the exact amount?
• Has the cost been shown separately on the invoice?
• Has the law firm avoided reclaiming input VAT on the cost?
• Is evidence retained for VAT purposes?

If the answer to any of these questions is unclear, the payment may not qualify as a disbursement for VAT purposes. This is why advice from VAT specialists is highly recommended. The correct VAT treatment depends on the facts, the evidence retained and whether the cost is genuinely incurred on the client’s behalf, rather than as part of the solicitor’s own services. 

How The VAT People can help solicitors

The VAT People advises law firms on VAT disbursement rules, VAT on disbursements, recharged expenses and HMRC compliance.

We can help solicitors assess whether costs are being treated correctly, including court fees, statutory fees, search fees, medical reports, registration fees and other expenses incurred during client matters.

Our support can include:

• Reviewing VAT treatment across solicitor invoices
• Assessing whether payments qualify as disbursements for VAT purposes
• Reviewing search fee and property transaction treatment
• Checking whether costs should be recharges or disbursements
• Advising on input tax recovery and valid VAT invoice requirements
• Supporting firms with HMRC VAT assessments
• Carrying out a VAT Health Check
• Advising on VAT dispute prevention and resolution

With three decades of experience, The VAT People provides practical VAT advice for professional services firms, including solicitors. Our team understands how HMRC approaches VAT compliance and can help your firm protect its position.