Disbursement (or not)

[Maria]

So… I would love to hear from others on your experience with this. I’ve recently been reviewing billing vat and disbursements. In particular categories on bills. I have seen disbursement Subject to vat and disbursement not subject to vat. The former, surely not a true disbursement at all but a recharge. I wonder if this is a common presentation. As I can see it there’s no wonder that the disbursement topic can cause additional confusion with a lack of definition on a bill, what categories for billing do others use to help staff. I’d prefer ‘recharges’ …maybe?

[Darren Whelan]

Hi Maria,

This is probably one of the most asked questions of all time!

As you’ve mentioned, there will be two types of costs that a legal practice can incur and pay whilst acting for a client – Disbursements and Recharges. Recharges will always attract the same VAT rate that the legal service attracts as they’re recharged overheads that the practice incurs in the course of providing service that the practice is recharging to the client.

Disbursements are slightly different in that under the VAT Act 1994 Section 47, there are two ways in which you can treat them in the accounts depending on who the supplier’s invoice is addressed to; the Principal Method for VAT and the Agency Method for VAT.

Principal Method – invoice will be addressed to the practice, allowing the practice to process net, reclaim the VAT and then bill to the client net plus VAT. This results in VAT neutral. When using this method, firms must not claim input VAT before it’s account for the relevant output VAT. HMRC must not be out of pocket at quarter end.

Agency Method – invoice will be addressed to the client, allowing the practice to process gross and outside the scope of VAT entirely.

There is a concession for law firms only with regard to the Principal Method in that the firm can readdress the invoice in the name and address of the client if the supplier agrees.

We host a 1 hour online workshop on this complex area of VAT law:

Disbursements, Recharges & VAT – Online Workshop

Hope this helps.

Darren

[Maria]

Thank you Darren. I’ll look at the 1 hour course, that’s really handy to know be useful for all accounts staff particularly new starters to billing.

[Darren Whelan]

No problem 🙂

It’s also good for fee-earner’s as ultimately, it’s the fee-earner that knows why they’ve incurred the cost/instructed the supplier and not finance. The fee-earner needs to provide sufficient information/narrative when requesting client related payments so that finance can then treat the cost correctly when processing to the accounts and when billing.

D

[Author]

Posts