Disbursements Flashcards
Overview
Firms not only have to charge VAT on their own legal fees (profit costs) but they also have to charge VAT on disbursements that have been incurred for a client if these are supplies it makes in the course of its business
Different methods of paying disbursements and VAT
The VAT treatment of these disbursements will differ depending on whether they are paid using the agency method or the principle method
The agency method
Where the agency method is used to pay a disbursement the VAT is not separated out and the firm simply pays the whole amount of the disbursement from the client cash account (if it holds enough money on behalf of the client) or out of the business cash account (if it does not hold sufficient client money).
The agency method - Which ledgers?
You would credit the cash ledger for either client or business account (depending on where it was being paid from) and debit the corresponding client ledger
The agency method - When will it be used
It is used when the client has instructed the provider directly and the invoice is therefore addressed to the client.
The agency method - When will it be used - Situations
In the context of property transactions, estate agents’ fees and surveyor’s fees are usually paid as agent as the firm of solicitors is not involved in instructing them
The principle method
This is used where the firm has requested the service and the invoice is addressed to them (the firm). The firm can claim the VAT element as input tax but to do so needs to record it in the HMRC ledger
The principle method - Which ledgers?
Business account of Client, cash and HMRC ledger
Example - Agency method
Payment to surveyor. We are holding £5,000 on the client account so therefore the surveyor’s invoice of £1,500 plus VAT of £300 can be paid out of the client account - this means that the entries will be made on the client side of the ledgers. Debit entry in the client side of the client’s ledger for £1,800 and the corresponding credit entry of £1,800 will be made in the client cash account
Example - Principle method
Payment for the environmental report. MUST be paid out of the business account. This is the case even though we are holding more than sufficient client money in the client account. 2 sets of entries required to record this because the net amount of the invoice (£2000) is treated differently to the VAT element of £400.
Example - Principle method - Net amount
So the net amount has been incurred on behalf of the client and can be entered as a debit in the business side of the client ledger. The corresponding credit entry of £2000 will be in the business cash account.
Example - Principle method - VAT element
400 debited from business account HMRC ledger and corresponding 400 credited to business account Cash ledger
Is it business or client money
Once a bill has been issued or the disbursements paid for any money received for those disbursements is not client money but belongs to the business
What money is money generally on account of costs and disbursements?
Client money
