Disbursements and VAT Flashcards
When does a disbursement attract VAT?
A) When the third party providing the service is VAT registered and the supply is taxable
B) When the law firm decides to charge VAT
C) When the client is VAT registered
D) When the disbursement is for a court fee
A) When the third party providing the service is VAT registered and the supply is taxable
Explanation:
VAT is chargeable on a disbursement only if the supplier (e.g., search provider, surveyor) is VAT registered and the supply is taxable. Court fees and Land Registry fees are outside the scope of VAT.
How does a law firm determine whether to use the agency or principal method for a disbursement?
A) By checking whether the invoice is addressed to the firm or the client
B) By checking whether the disbursement is subject to VAT
C) By checking whether the client has sufficient funds
D) By checking whether the disbursement was paid from the business account
A) By checking whether the invoice is addressed to the firm or the client
Explanation:
If the invoice is addressed to the client, the firm is acting as an agent. If the invoice is addressed to the law firm, it is acting as a principal and must account for VAT separately.
Under the agency method, how is a VAT-inclusive disbursement recorded in the client ledger?
A) The VAT and disbursement amounts are combined into a single total entry
B) Only the disbursement amount is recorded
C) The VAT is recorded separately in the VAT account
D) The VAT and disbursement are recorded separately in the business account
A) The VAT and disbursement amounts are combined into a single total entry
Explanation:
When using the agency method, the firm is paying the invoice on behalf of the client, so the total disbursement including VAT is recorded as a single transaction in the client ledger.
A law firm pays a search fee of £300 plus VAT, with the invoice addressed to the client. How should this payment be recorded?
A) Debit the client ledger business account £360, credit the VAT account £60
B) Debit the VAT account £60, credit the cash sheet client account £60
C) Debit the client ledger client account £300, credit the cash sheet business account £300
D) Debit the client ledger client account £360, credit the cash sheet client account £360
D) Debit the client ledger client account £360, credit the cash sheet client account £360
Explanation:
Since the invoice is addressed to the client, the firm is acting as an agent. The total payment, including VAT, is recorded as a debit in the client ledger and a credit in the client account cash sheet.
A law firm hires a surveyor for a client’s property transaction. The invoice of £700 plus VAT is addressed to the law firm. What method applies?
A) The firm is acting as an agent
B) The firm should request the client to pay the invoice directly
C) The firm should not account for VAT separately
D) The firm is acting as a principal
D) The firm is acting as a principal
Explanation:
Since the invoice is addressed to the law firm, the firm is acting as a principal and must separate VAT from the disbursement amount when recording the payment.
When paying a disbursement under the principal method, how should VAT be initially recorded?
A) Debit the client ledger business account and credit the VAT account
B) Debit the VAT account and credit the client ledger business account
C) Debit the VAT account and credit the cash sheet business account
D) Debit the client ledger client account and credit the VAT account
C) Debit the VAT account and credit the cash sheet business account
Explanation:
Under the principal method, VAT is recorded separately from the disbursement. The VAT is debited to the VAT account and credited to the business account cash sheet.
After a law firm pays a disbursement plus VAT under the principal method, when does the VAT amount move to the client ledger?
A) Immediately after payment
B) When the client pays their invoice
C) When the law firm issues a bill to the client
D) At the end of the financial year
C) When the law firm issues a bill to the client
Explanation:
Until the firm bills the client, the VAT remains in the VAT account. Once billed, a debit is made in the client ledger business account and a credit is made in the VAT account.
A law firm pays an environmental search fee of £100 plus VAT and incorporates it into a report for the client. How should the VAT be accounted for?
A) Combined with the disbursement in the client ledger client account
B) Separately in the VAT account, with the disbursement in the client ledger business account
C) Deducted from the client’s funds held on account
D) Not recorded, as VAT does not apply to search fees
B) Separately in the VAT account, with the disbursement in the client ledger business account
Explanation:
Since the law firm incorporates the search into their service, they are acting as a principal. The disbursement and VAT must be accounted for separately, with VAT initially going into the VAT account.
If a law firm incorrectly treats a principal disbursement as an agency disbursement, what could be a consequence?
A) The client may refuse to pay
B) The firm may face VAT compliance issues
C) The transaction may have to be reversed
D) The third-party supplier may refuse to accept payment
B) The firm may face VAT compliance issues
Explanation:
If the law firm incorrectly treats a principal disbursement as an agency disbursement, it fails to account for VAT properly, which can lead to VAT reporting and compliance issues with HMRC.
Which of the following is a correct statement regarding disbursements?
A) VAT must always be charged on disbursements
B) Disbursements are recorded differently based on whether they are paid as an agent or a principal
C) Client money must always be used to pay disbursements
D) The law firm is required to pay all disbursements before billing the client
B) Disbursements are recorded differently based on whether they are paid as an agent or a principal
Explanation:
Disbursements paid as an agent are recorded as a single entry including VAT, while disbursements paid as a principal require separate accounting entries for VAT and the disbursement itself.
