Solicitors' Accounts - Dealing with VAT

Question 1

Output Tax

Answer 1

Charged by a business to customers

Question 2

Input Tax

Answer 2

Charged to the business by its suppliers

Question 3

Disbursements and VAT

Answer 3

HMRC does not consider disbursements as part of the supply of legal services - therefore, firm does not have to charge VAT on them

Question 4

Is expense a disbursement?

Answer 4

• Firm acted as agent for client when paying supplier
• Client received and used goods
• Client responsible for payment
• Client authorised firm to pay it on their behalf
• Client aware goods are from another supplier

Question 5

Disbursement examples (no VAT charged)

Answer 5

• Court fees
• Company search fees
• Company registration fees
• Witness fees
• Oath fees paid to another solicitor

Question 6

Invoice Addressed to Client

Answer 6

Agency Method

Firm pays invoice (inc. VAT) to third party on behalf of client

Can be paid out of client account (if enough money), if not it will need to be paid out of the business account

Debit client ledger and credit cash sheet in either client or business account (depending on which was used)

No entry in HMRC ledger as not charging VAT it is being passed on to client

Question 7

Client invoice addressed to firm

Answer 7

Principal Method

Treat third party as making a supply of services to the firm - firm can claim supply as input tax

Firm must use business account (even if there are sufficient funds in client account)

Firm re-supplies to the client (inc. VAT)

Question 8

Counsel’s invoice addressed to firm

Answer 8

Firm’s name can be crossed out and replaced with client’s name

Can then use the agency method