VAT Treatment of Disbursements for Law Firms: What You Need to Know

Imagine this: You have just finalised a complex case and are preparing the final invoice for your client. You have paid several third-party costs along the way, court fees, Land Registry charges, property searches. Now you are stuck wondering: “Should I be charging VAT on these, or not?”

It is a common question. And one that can have serious consequences if answered incorrectly.

For law firms across the UK, understanding the difference between a disbursement and a recharge is more than just good housekeeping, it is a compliance essential. Get it wrong, and you may overcharge your client, underpay HMRC, or both.

Let us demystify the VAT treatment of disbursements for law firms, so you can bill with confidence and stay firmly on the right side of HMRC.

What is Going Wrong?

Many legal professionals assume that any third-party cost passed on to a client is a disbursement and should be excluded from VAT, but that is not the case and HMRC is paying closer attention than ever.

In fact, some of the most common law firm costs, such as property searches and online databases, are not disbursements at all under VAT rules. They are recharges.

Failing to apply VAT correctly on these items can lead to:

• Incorrect invoices (leaving clients confused or frustrated)
• Underpaid VAT returns (triggering penalties or HMRC scrutiny)
• Compliance risks (especially during VAT inspections or audits)

You are not alone in this. Even well-established firms have fallen into grey areas, including in the widely referenced case of Brabners LLP v HMRC. The issue is not just about how costs are incurred, but how they are used.

How to Fix It: Understanding Disbursements vs Recharges (2025 Guidance)

The key to accurate VAT treatment lies in distinguishing between true disbursements and recharges. Let us break it down:

Disbursements (No VAT Applied)

A disbursement occurs when all HMRC's 8-point test are met for a cost to be treated as a disbursement. You can read the full guidance here.

Recharges (VAT Must Be Added)

If the cost is incurred by your firm to help you deliver your service, and the client benefits only indirectly, it is a recharge. Even if the third party did not charge VAT to you, you must charge VAT when passing the cost on.

Insight: In Brabners LLP v HMRC (2017), property search fees were found to be recharges because they formed part of the advice being delivered to clients, not disbursements. Therefore, VAT was due.

What This Achieves: Confidence, Compliance and Client Trust

By applying VAT correctly to disbursements and recharges:

• You protect your firm from HMRC disputes or penalties
• You build trust with clients through transparent invoicing
• You avoid overcharging or undercharging VAT
• You free up time from dealing with billing corrections or VAT queries
• You demonstrate professionalism and accuracy — key to long-term growth

This clarity is not just about compliance. It is about making your processes smoother, your client relationships stronger, and your financial reporting sharper.

What to Do Next: Review and Strengthen Your VAT Position

Understanding VAT treatment is only the first step. Now is the time to:

• Review your billing templates and policies — Are you itemising costs correctly?
• Train your team — Make sure all fee earners understand what counts as a disbursement.
• Seek proactive advice — Our VAT specialists can review your current practices and help identify any hidden risks or improvements.

Speak to our team at Wright Vigar. We are here to support law firms across the UK with tailored VAT guidance and practical compliance strategies.