Solicitors Accounts VAT

Question 1

How should VAT to communicated to clients?

Answer 1

Should quote their fees ‘plus VAT’ otherwise it is assumed that the price given includes VAT
- then held to this

Question 2

What is an important consideration for reclaiming input tax?

Answer 2

Must ensure you get a VAT invoice or you will not be able to reclaim VAT

Question 3

how is a disbursement treated to VAT purposes?

Answer 3

Disbursements not regarded as part of legal services so CANNOT charge VAT on them

Question 4

What are the conditions for something to be a disbursement?

Answer 4

1. firm paid supplier on clients behalf as clients agent
2. client used/had benefit of it
3. client was responsible for paying supplier
4. client authorised firm to make payment on its behalf
5. Supplier was aware that good/service came from 3rd party not firm

Question 5

Which costs are not disbursements?

Answer 5

Must charge VAT on them (normally included as part of profit cost)

1. phone call charges
2. travel expenses
3. postage fees
4. photocopy charges
5. bank transfer fees
6. property search fees

Question 6

Entries for bill for £2000 profit cost and £400 VAT

Answer 6

1. Client ledger (business side)
   - Debit £2000
   - Debit £400
2. Profit Cost Ledger (business side)
   - credit £2000
3. HMRC Ledger (business side)
   - credit £400

Question 7

When things may a law firm not recover VAT for (as input tax as cannot charge VAT on disbursements)?

Answer 7

things that are exempt supplies or not considered in the course of business

Examples
- company search fees
- company registration fees
- court fees
- witness fees
- oath fees to other solicitors
- SDLT
- Land Registry Fees

Question 8

How should invoices addressed to client vs addressed to firm be dealt with?

Answer 8

1. Invoice Addressed to client
   - use Agency Method
2. Invoice Adressed to Firm
   - Principle Method
3. Exception for Legal Council
   - if in firm name can simply replace with clients name

Question 9

What is the agency method

Answer 9

If invoice addressed to client

• supply treated as if made to client
• firm pays full amount (inc VAT)
• can send invoice to client so they can reclaim the VAT

Question 10

What is principle method

Answer 10

If Invoice addressed to firm

• firm pay full amount inc VAT
• MUST use business money
• charge client full amount including VAT by passing on service
• have to debit client ledger and HMRC ledger to note the debt

Question 11

Entires for using agency method if there are costs on account? (for £100 profit cost)

Answer 11

Have to charge full amount including VAT so £120 in this case

Client ledger (client side)
- debit £120

Cash ledger (client side)
- credit £120

Question 12

Entries if using principle method (for £100 profit cost)

Answer 12

Have to use business money and cannot pass on VAT

Client Account (business side)
- debit £100 (and note VAT next to it)

HMRC Ledger
- debit £20 (VAT) as this is to be paid by client

Cash Ledger (business side)
- credit £100
- credit £20