Conveyancing generates a high volume of third-party costs: search fees, Land Registry fees, SDLT payments, and local authority charges. Getting the VAT treatment wrong on these disbursements is one of the most common errors in law firm VAT returns, and HMRC has shown increasing interest in this area during compliance checks.

This article explains the distinction between agency disbursements and principal disbursements, sets out the correct VAT treatment for each category, and highlights the practical steps a solicitor should take to avoid penalties.

Why the Distinction Matters for a Solicitor

The VAT treatment of a disbursement depends on whether the solicitor acts as an agent for the client or as a principal purchasing the service on their own account. If you treat a principal disbursement as an agency disbursement and omit VAT, you under-declare output tax. If you treat an agency disbursement as a principal disbursement and add VAT, you overcharge the client and create a potential input tax recovery issue.

HMRC's policy is set out in VAT Notice 700 (section 25) and the specific legal sector guidance in VAT Notice 701/48. The key test is whether the solicitor is the recipient of the supply or merely the conduit for payment.

Agency Disbursements: The Correct VAT Treatment

An agency disbursement is a payment made by the solicitor on behalf of the client, where the solicitor acts as the client's agent. The solicitor does not receive the supply. The supply is made directly to the client by the third-party provider.

For a payment to qualify as an agency disbursement, all of the following conditions must be met:

  • The solicitor pays the amount to the third party on the client's instruction and authority.
  • The client receives and benefits from the goods or services provided by the third party.
  • The client is responsible for paying the third party, but the solicitor handles the payment as agent.
  • The solicitor separately identifies the disbursement on the invoice to the client.
  • The solicitor's invoice shows that the amount is a disbursement paid on the client's behalf.

When these conditions are satisfied, the solicitor does not add VAT to the disbursement on the client invoice. The third-party supplier charges VAT (if applicable) directly to the client, and the client can recover that input tax if they are VAT-registered.

Common conveyancing agency disbursements include:

  • Land Registry search fees (LLC1, CON29, OS1)
  • Local authority search fees
  • Drainage and water search fees
  • Environmental search fees
  • SDLT (Stamp Duty Land Tax) paid to HMRC
  • Land Registry registration fees
  • Bank transfer fees for completion

In each case, the solicitor is simply passing the cost through to the client. The supply is between the third party and the client. No VAT is added by the solicitor.

Principal Disbursements: When the Solicitor Is the Customer

A principal disbursement arises when the solicitor purchases a service or product from a third party in their own name, even if the cost is later recharged to the client. In this scenario, the solicitor is the recipient of the supply. The third party invoices the solicitor, and the solicitor recharges the cost to the client.

Because the solicitor receives the supply, they must account for VAT on the recharge to the client. The solicitor can recover the input VAT on the original purchase (if the firm is VAT-registered and the expense relates to taxable supplies), but must charge output VAT on the recharge to the client.

Common conveyancing principal disbursements include:

  • Panel management fees charged by a conveyancing panel manager
  • Insurance premiums (e.g., indemnity insurance) where the solicitor arranges the policy
  • Property portal fees (e.g., for electronic case management systems)
  • Third-party software licences used to process the transaction
  • Courier or document delivery charges
  • Photocopying and printing costs

The critical distinction is that the solicitor has contracted with the third party, not the client. The client is not the recipient of the original supply. The solicitor must therefore add VAT at 20% to the recharge on the client invoice.

Worked Example: Agency vs Principal in Practice

Example 1: Agency disbursement

A solicitor pays £30 plus VAT (£36 total) for a local authority search. The search provider invoices the solicitor, but the supply is to the client. The solicitor recharges £36 to the client as a disbursement. No VAT is added by the solicitor. The client sees £36 on the invoice with the label "disbursement: local authority search".

Example 2: Principal disbursement

A solicitor pays £100 plus VAT (£120 total) for an indemnity insurance policy arranged in the solicitor's name. The insurer invoices the solicitor. The solicitor recharges the cost to the client. Because the solicitor received the supply, they must add VAT. The recharge to the client is £120 plus VAT at 20% = £144. The solicitor accounts for £24 output VAT and recovers the £20 input VAT on the original invoice.

In Example 2, if the solicitor simply recharged £120 as a disbursement without adding VAT, they would under-declare output tax by £24. HMRC can assess that under-declaration plus interest and penalties.

Common Conveyancing VAT Errors Solicitors Make

1. Treating all third-party costs as agency disbursements. Many solicitors assume that any cost paid to a third party on behalf of a client is an agency disbursement. This is incorrect. If the solicitor contracts in their own name, it is a principal disbursement. Indemnity insurance is a classic example.

2. Failing to separate disbursements on the invoice. HMRC requires that agency disbursements be clearly identified as such on the client invoice. If you bundle them into a single "disbursements" line without itemisation, you risk HMRC treating the entire amount as a principal recharge subject to VAT.

3. Adding VAT to SDLT payments. SDLT is a tax paid to HMRC, not a supply of goods or services. It is an agency disbursement. No VAT should be added. Some solicitors mistakenly add VAT to the SDLT amount shown on the completion statement, which overcharges the client and creates a reporting error.

4. Incorrect treatment of electronic bank transfer fees. Bank transfer fees paid by the solicitor on completion are typically agency disbursements (the client is responsible for the cost of transferring funds). However, if the solicitor uses a third-party payment service that charges a fee to the solicitor, the treatment depends on who contracted with the service provider. If the solicitor contracted directly, it becomes a principal disbursement.

5. Overlooking VAT on panel manager fees. Many conveyancing firms use panel management companies that charge a fee per transaction. The panel manager invoices the solicitor. The solicitor recharges the fee to the client. This is a principal disbursement because the solicitor contracted with the panel manager. VAT must be added to the recharge.

Practical Steps for Compliance

Review your disbursement categories annually. Create a written policy that lists every type of third-party cost your firm incurs in conveyancing transactions, with a clear designation of agency or principal status. Update this policy when you add new services or change suppliers.

Train your fee-earners and accounts team. The person preparing the completion statement or client invoice needs to know the difference. A paralegal who treats an indemnity insurance premium as an agency disbursement creates a VAT error that the COFA must catch.

Use separate nominal codes in your accounting system. Agency disbursements and principal disbursements should be recorded in different nominal ledger codes. This makes VAT return preparation easier and provides an audit trail.

Keep supplier contracts on file. If HMRC challenges a disbursement treatment, you need to show who contracted with the third party. A copy of the supplier agreement or invoice showing the solicitor as the customer is essential evidence.

Check your SRA Accounts Rules compliance. Remember that client money used to pay disbursements must be handled correctly under the SRA Accounts Rules. If you pay a principal disbursement from client account, you may need to transfer funds from office account first. See our guide on SRA Accounts Rules essentials for more detail.

What Happens If HMRC Finds an Error?

If HMRC discovers that a solicitor has treated principal disbursements as agency disbursements and omitted VAT, they will issue an assessment for the under-declared output tax. Interest runs from the date the VAT should have been paid. Penalties depend on whether HMRC considers the error to be careless or deliberate.

A careless error (failure to take reasonable care) attracts a penalty of up to 30% of the additional tax. A deliberate error can attract a penalty of up to 100%. If the solicitor voluntarily discloses the error before HMRC opens a check, penalties are typically reduced.

If the error goes the other way (adding VAT to agency disbursements), the solicitor has overcharged the client. The client may demand a refund of the overpaid VAT. The solicitor must then adjust their VAT return and repay the client.

For COFAs and compliance officers, this is a high-risk area. Our COFA compliance support service can help you review your firm's disbursement processes and implement controls.

Special Cases: SDLT, Land Registry, and Search Fees

SDLT. SDLT is a tax, not a supply. The solicitor pays HMRC on the client's behalf. It is always an agency disbursement. No VAT is added. The same applies to Land Transaction Tax in Wales and LBTT in Scotland.

Land Registry fees. These are statutory fees paid to HM Land Registry. The solicitor acts as agent. No VAT is added.

Search fees. Most search fees (local authority, environmental, drainage) are agency disbursements because the search provider supplies the report to the client. However, if the solicitor subscribes to a search portal that charges an annual fee and provides unlimited searches, the cost per search may be a principal disbursement because the solicitor contracted for the portal service. Check the terms of your search provider agreement.

Summary of VAT Treatment for Common Conveyancing Costs

Cost TypeTreatmentVAT on Recharge?
Local authority searchAgencyNo
Land Registry searchAgencyNo
Environmental searchAgencyNo
SDLT paymentAgencyNo
Land Registry registration feeAgencyNo
Bank transfer feeAgency (usually)No
Indemnity insurance premiumPrincipal (usually)Yes, 20%
Panel manager feePrincipalYes, 20%
Courier/postagePrincipalYes, 20%
PhotocopyingPrincipalYes, 20%

This table is a general guide. The specific facts of each transaction and the terms of your supplier agreements determine the correct treatment.

How a Solicitor Accountant Can Help

Getting disbursement VAT treatment wrong is costly and time-consuming to correct. A solicitor-specialist accountant can review your firm's processes, check your nominal ledger coding, and advise on borderline cases. If you are unsure whether a particular cost is an agency or principal disbursement, ask before you invoice the client.

We work with conveyancing firms of all sizes, from sole practitioners to multi-partner LLPs. If you need a second opinion on your firm's VAT treatment of disbursements, contact us for a confidential discussion.

For more on law firm VAT compliance, see our guide on solicitor accounting services and our SRA client account reserve calculator.