VAT

Question 1

Which expenses are recognised as ‘disbursements for VAT purposes’?

Answer 1

These are expenses which are deemed to be separate from the legal services provided by the firm, the firm merely arranges for the supply of the third-party service to the client.

SDLT, land registry registration fee, probate fees, court fees.

Question 2

Which expenses are NOT recognised as disbursements for VAT purposes?

Answer 2

Expenses that are treated as part of the firm’s overheads in providing legal services to clients.

e.g. postage, travel expenses, photocopying, printing.

AND expenses that are deemed to be integral to the legal services provided by the firm e.g. where the firm provides legal advice on a service supplied by a third party.

e.g. some conveyancing searches, experts’ fees

Question 3

Disbursements not subject to VAT. What accounting entries are required to record payment of a disbursement not subject to VAT?

Answer 3

If paid from client account (sufficient funds):
-DR client ledger client account
-CR cash sheet client account

If paid from the business account (insufficient funds in the client account):
-DR client ledger business account
-CR cash sheet business account

Question 4

Disbursements subject to VAT using the agency method. What are the journal entries to record payments of a disbursement subject to VAT using the agency method?

Answer 4

If paid from the client account (where sufficient funds are available):
-DR client ledger client account
-CR cash sheet client account

If paid from the business account (where sufficient funds are NOT available in the client account):
-DR client ledger business account
-CR cash sheet business account

Question 5

What are the accounting entries for the two stages involved in paying a disbursement subject to VAT using the principal method?

Answer 5

Stage 1 - firm pays disbursement + VAT:

Disbursement:
DR client ledger business account
CR cash sheet business account

VAT:
DR HMRC-VAT ledger (input tax)
CR cash sheet business account

Stage 2 - firm recharges disbursement to client when billing for profit costs

Profit costs:
DR client ledger business account
CR profit costs ledger

VAT (on both profit costs and disbursement):
DR client ledger business account
CR HMRC-VAT ledger (output tax)