Disbursement or Recharge Calculator

Added: January 18, 2023 | Last Updated on May 30, 2024

Analysis Method

Each type of cost and the circumstance it was incurred must be first ascertained before determining if a cost is a disbursement or a recharge.

Disbursement or Recharge Calculator
i.e. instructed an agency to obtain searches or medical records/report on your behalf.
i.e. utilised the content of a search result or report in order to advise the client.
Tax Tribunal 'BGT vs Commissioners of HMRC' applies to Medical Reports/Records
This concession applies to law firms only and the supplier MUST agree to this. Ensure you have this evidenced in writing.
Based on the answers provided above, the cost is a 'Recharge'.

  • If you have been issued a VAT invoice from the supplier, you can reclaim any output VAT charged to you by the supplier as input VAT.
  • If it has been agreed with the client that this cost will be recharged to them, you include the net value of supplier's supply in your overall legal supply when calculating output VAT. i.e you treat the recharged cost as additional fee when billed to the client.
  • If you have not been issued with a VAT invoice from the supplier or the supplier is not registered for VAT and it has been agreed with the client that this cost will be recharged to them, you include the total value of supplier's supply in your overall legal supply when calculating VAT. i.e you treat the recharged total cost as additional fee when billed to the client.
  • The cost is itemised as an additional charge on your invoice/bill to the client.

You must not mislead the client into thinking an item of expenditure is something you have paid on their behalf.

VAT Invoice - Compliant Example

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VAT Invoice - Non-Compliant Example

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Based on the answers provided above, the cost qualifies to be an 'Agency Method' Disbursement'.

  • When processing the cost to the client's ledger, you may either pay direct out of client account if you have sufficient funds held in client account for it or you can pay the cost from the business account.
  • If you process the cost to the business side of the client's ledger, ensure you post the cost as 'outside the scope of VAT' as there no consideration for supply. The cost must not be included on the firms VAT return.
  • If, when recharging the cost to the client, you decide to include the cost on your bill/invoice, you must include the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.

You must not mislead the client into thinking an item of expenditure is something you have paid on their behalf.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be an 'Agency Method' Disbursement'.

  • When processing the cost to the client's ledger, you may either pay direct out of client account if you have sufficient funds held in client account for it or you can pay the cost from the business account.
  • If you process the cost to the business side of the client's ledger, ensure you post the cost as 'outside the scope of VAT' as there no consideration for supply. The cost must not be included on the firms VAT return.
  • If, when recharging the cost to the client, you decide to include the cost on your bill/invoice, you must include the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.
  • As you have applied the concession to law firms by replacing your name and address with the client's name and address, you must send the client the original VAT invoice from the supplier; you may keep a copy. If your client is a VAT registered business, they may be able to reclaim the supplier's output VAT is input VAT through their own VAT return.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be a 'Principal Method Disbursement'

  • When processing the cost to the client's ledger, you must reclaim any output VAT charged to you by the supplier as input VAT
  • When recharging the cost to the client, you include the net value of supplier's supply in your overall legal supply when calculating output VAT i.e you treat the recharged cost as disbursement subject to VAT when billed to the client
  • You must account for output VAT on the supplier's supply within the same VAT quarter
  • The cost is itemised as a disbursement subject to VAT on your invoice/bill to the client

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be a 'Principal Method Disbursement'

  • Even though the supplier has not charged you output VAT, when processing the cost to the client's ledger, you must analyse it as an input to the business i.e. ensure the net value of the supplier's supply is included as an input on the firms VAT return.
  • When recharging the cost to the client, you recharge the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Transactional Method

The Transactional Method calculator is provided for guidance purposes only. There is no substitute for analysing each type of payment by reference to the Analysis Method calculator.

Disbursement or Recharge Calculator
If your payment is not listed, use the Analysis Method calculator.
i.e. instructed an agency to obtain searches or medical records/report on your behalf.
i.e. utilised the content of a search result/report in order to advise the client or obtained additional copies of Grant of Probate in order to speed up the progression of a case etc?
This concession applies to law firms only and the supplier MUST agree to this. Ensure you have this evidenced in writing.
Based on the answer(s) provided above, the cost is a 'Recharge'.

  • If you have been issued a VAT invoice from the supplier, you can reclaim any output VAT charged to you by the supplier as input VAT.
  • If it has been agreed with the client that this cost will be recharged to them, you include the net value of supplier's supply in your overall legal supply when calculating output VAT. i.e you treat the recharged cost as an additional charge when billed to the client.
  • If you have not been issued with a VAT invoice from the supplier or the supplier is not registered for VAT and it has been agreed with the client that this cost will be recharged to them, you include the total value of supplier's supply in your overall legal supply when calculating VAT. i.e you treat the recharged total cost as additional charge when billed to the client.
  • The cost is itemised as an additional charge on your invoice/bill to the client.

You must not mislead the client into thinking an item of expenditure is something you have paid on their behalf.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be an 'Agency Method' Disbursement'.

  • When processing the cost to the client's ledger, you may either pay direct out of client account if you have sufficient funds held in client account for it or you can pay the cost from the business account.
  • If you process the cost to the business side of the client's ledger, ensure you post the cost as 'outside the scope of VAT' as there no consideration for supply. The cost must not be included on the firms VAT return.
  • If, when recharging the cost to the client, you decide to include the cost on your bill/invoice, you must include the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be an 'Agency Method' Disbursement'.

  • When processing the cost to the client's ledger, you may either pay direct out of client account if you have sufficient funds held in client account for it or you can pay the cost from the business account.
  • If you process the cost to the business side of the client's ledger, ensure you post the cost as 'outside the scope of VAT' as there no consideration for supply. The cost must not be included on the firms VAT return.
  • If, when recharging the cost to the client, you decide to include the cost on your bill/invoice, you must include the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.
  • As you have applied the concession for law firms by replacing your name and address with the client's name and address, you must send the client the original VAT invoice from the supplier; you may keep a copy. If your client is a VAT registered business, they may be able to reclaim the supplier's output VAT is input VAT through their own VAT return.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be a 'Principal Method Disbursement'

  • When processing the cost to the client's ledger, you must reclaim any output VAT charged to you by the supplier as input VAT.
  • When recharging the cost to the client, you include the net value of supplier's supply in your overall legal supply when calculating output VAT i.e you treat the recharged cost as disbursement subject to VAT when billed to the client.
  • You must account for output VAT on the supplier's supply within the same VAT quarter.
  • The cost is itemised as a disbursement subject to VAT on your invoice/bill to the client.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Based on the answers provided above, the cost qualifies to be a 'Principal Method Disbursement'

  • Even though the supplier has not charged you output VAT, when processing the cost to the client's ledger, you must analyse it as an input to the business i.e. ensure the net value of the supplier's supply is included as an input on the firms VAT return.
  • When recharging the cost to the client, you recharge the net value of the supplier's supply on your bill/invoice as 'outside the scope of VAT' and itemise the cost as a disbursement not subject to VAT on your bill/invoice to the client.

VAT Invoice - Compliant Example

VIEW

 

VAT Invoice - Non-Compliant Example

VIEW

Disbursement or Recharge?

This compliance tool is designed to assist with the decision making process when trying to ascertain if a cost is a disbursement for VAT purposes or a recharged overhead.

The subject of Disbursements and Recharges is a complex area of VAT law. It’s a subject that continues to cause issues within the legal profession.

If you work in legal practice, you need to have an awareness that there are are two types of costs that a solicitor/lawyer can incur and pay whilst acting for a client – Disbursements and Recharges. You need to understand the difference between the two costs, how they’re processed to the accounts and where they must be situated on the bill to the client.

Disbursements

Payments you incur and pay on behalf of the client as agent as a matter of convenience. The third party supply will have be been received and used by client. You’re simply acting as agent when paying the supplier.

Recharges (non-qualifying payments)

Overheads you incur and pay in order to enhance and provide your own service to the client. The third party supply will have been received and used by your firm and not the client.

If you’d like deeper/better understand of the difference between the two costs, we host a separate 1 hour session on the subject – details, below.

Legal Status

Practice notes, training sessions and compliance calculators represent the Association of Legal Compliance & Accounts’ view of good practice in a particular area. They are not intended to be the only standard of good practice that firms can follow.

Practice notes, training sessions and compliance calculators are not legal advice, and do not necessarily provide a defence to complaints of misconduct or poor service. While we have taken care to ensure that they are accurate, up to date and useful, we will not accept any legal liability in relation to them.

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Disbursements, Recharges & VAT

On Demand Training Workshops

Disbursements, Recharges & VAT

Quizzes

Disbursements, Recharges & VAT

Further help

Compli-Q: What is a disbursement?

Compli-Q: What is a recharge?

Issues to consider: Identifying Disbursements in Particular Areas

Accounts & Finance Practice Notes

Compli-Q

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