Few VAT questions catch UK law firms out more often than the line between a disbursement and a recharge. Get it right and you pass certain third-party costs to the client cleanly, outside the scope of VAT. Get it wrong and you have under-declared output tax, which HMRC can assess with interest and penalties going back several years. The rules are precise, and one widely repeated assumption, that official searches are automatically VAT-free, has been wrong since 2017.

This guide sets out the test that governs every disbursement decision: HMRC's eight conditions. It then applies that test to the payments a law firm makes most often, including the search fees that the Brabners case put firmly inside the firm's taxable supply. We cover the general principle here. Two companion guides apply it to specific areas: conveyancing VAT and VAT on counsel's fees.

Start from the right baseline. Legal services supplied by a solicitor, whether advice, conveyancing, litigation or drafting, are standard-rated at 20%. There is no VAT exemption for residential conveyancing or for any mainstream legal work. A firm must register for VAT once its taxable turnover exceeds the registration threshold of £90,000 (from 1 April 2024).

Because your own supply is standard-rated, the default treatment of a cost you pass to the client is that it forms part of that supply and carries VAT. A disbursement is the exception to that default, not the starting point. The burden is on the firm to show that a payment meets every condition before it is treated as outside the scope of VAT.

The Eight Conditions for a True Disbursement

HMRC's guidance (VAT Notice 700, section 25.1.1) sets out eight conditions. A payment is a disbursement, outside the scope of VAT, only if all eight are met. Fail a single one and the payment is part of your standard-rated supply.

  1. You acted as the agent of your client when you paid the third party.
  2. Your client received and used (or had the benefit of) the goods or services you paid for.
  3. It was your client's responsibility to pay the third party, not yours.
  4. Your client authorised you to make the payment.
  5. Your client knew that the goods or services were supplied by a third party, not by you.
  6. You show the cost separately itemised on your invoice.
  7. You recover only the exact amount you paid, with no mark-up.
  8. The goods or services are clearly additional to your own supply.

Two of these conditions do most of the work in practice. Condition two asks whether the client, rather than your firm, actually used the thing you paid for. If you consumed it in order to produce your own advice, it is yours, not the client's, and it fails. Condition eight asks whether it really is something extra, separate from the service you were engaged to deliver, or just an input cost of that service. A cost that is woven into your work product is not additional to it.

What Happens When a Payment Fails the Test

A payment that fails any condition is not a disbursement. It is a recharge, which means it is treated as part of your own standard-rated legal supply. You add 20% VAT when you bill it on to the client.

This is true even where the original cost carried no VAT. A common error is to reason that, because the third party did not charge VAT, the firm has nothing to add. That confuses the supply made to your firm with the supply your firm makes to the client. If you used the item in your work, your onward charge for it is standard-rated whatever the input position was. The flip side is that, because the cost is now part of your taxable supply, you can recover any input VAT you were charged on it in the normal way.

Search Fees: the Brabners Carve-Out

The single most important development in this area is the treatment of property search fees, and it is where the old guidance most often goes wrong. It is no longer correct to say that Land Registry searches, local authority searches and similar official searches are automatically VAT-free disbursements. Whether a search fee is a disbursement turns on how you use the result.

In Brabners LLP v HMRC [2017] UKFTT 0666 (TC) the First-tier Tribunal considered electronic property search fees a firm had obtained from a search agency. Because the firm used those search results "as part and parcel of its overall service", interpreting them and reporting to the client on what they meant, the Tribunal held the fees were not disbursements. They were a cost component of the firm's own standard-rated supply, and VAT should have been charged on them. In other words, a search you read, interpret and advise on fails conditions two and eight: the firm used it, and it was not additional to the firm's service but an input to it.

The delivery method does not save it. HMRC's settled position in Revenue and Customs Brief 6 (2020) withdrew the informal 1991 postal-search concession with effect from 1 December 2020, and put postal and electronic searches on the same functional footing. The question now is purely functional:

  • If you pass the raw search result straight to the client as a pure conduit, without interpreting it in your advice, and the eight conditions are met, it can be a disbursement.
  • If you use or interpret the result in your own advice, it is part of your taxable supply and you add VAT.

For most conveyancing work the practical answer is that searches are used in the firm's report on title and are therefore part of the taxable supply. The detailed application to conveyancing is covered in our conveyancing VAT guide.

What Is, and Is Not, a Disbursement

Applying the eight conditions to the payments a law firm makes most often gives a workable shortlist.

Clean Disbursements (No VAT)

These are statutory charges and taxes the client is liable for, where the firm acts as a pure conduit:

  • Court and tribunal fees paid on the client's matter.
  • Land Registry registration fees (the fee to register a dealing, as distinct from a search the firm interprets).
  • SDLT, LBTT or LTT paid for the client (Stamp Duty Land Tax in England and Northern Ireland, Land and Buildings Transaction Tax in Scotland, Land Transaction Tax in Wales).

In each case the client is liable for the charge, authorises the payment, and the firm recovers the exact amount, separately itemised.

Not Disbursements (Standard-Rated Recharges)

  • CHAPS and bank transfer fees. The bank supplies the transfer to your firm, not to your client, so passing on the cost is a recharge. Add VAT.
  • Photocopying, printing, postage and courier. These are overheads of delivering your service, not something the client separately bought from a third party.
  • Search fees used in your advice. Post-Brabners, a search you interpret and report on is part of your taxable supply.

The pattern is consistent. Where the third party really supplied the client, and your firm only handled the payment, you have a disbursement. Where the third party supplied your firm, and you used what you bought to do your job, you have a taxable input that you recharge with VAT.

A Worked Example

Consider a firm acting on a property purchase. It pays the Land Registry registration fee, orders a bundle of searches from a search provider, and arranges a same-day CHAPS payment to complete. Three payments, three different answers.

  • The registration fee is a statutory charge the client is liable for. The firm pays it as agent and recovers the exact amount. Disbursement, no VAT.
  • The searches are read by the conveyancer, who reports to the client on what they reveal. The firm used them in its advice, so they fail conditions two and eight. Standard-rated recharge, add VAT.
  • The CHAPS fee is the bank's charge to the firm for moving the firm's money. The bank supplied the firm. Standard-rated recharge, add VAT.

Three payments that an older billing template might have lumped together as "disbursements" actually split two-to-one in favour of VAT. That is precisely the kind of split an HMRC inspection looks for.

Documentation and Invoicing

The eight conditions are evidential as much as conceptual, so your records have to support them. For each item you treat as a disbursement, keep:

  • Evidence that the cost was the client's liability, not the firm's.
  • The client's authority to make the payment.
  • The original invoice or receipt from the third party.
  • A clear trail showing you recovered the exact amount, with no mark-up.

On the invoice, list true disbursements separately from your fees and from your standard-rated recharges, so the VAT position of each line is unambiguous. If a search provider's invoice carried VAT and you are recharging the search as part of your supply, recover that input VAT and apply output VAT on your onward charge in the normal way. Mixing the two presentations is what creates the under-declaration HMRC looks for.

Counsel's Fees Are a Separate Question

Counsel's (barrister's) fees deserve their own analysis, because the default is the opposite of a disbursement. In the normal case counsel supplies the firm, which uses that work in its onward supply to the client: the firm recovers the input VAT on counsel's fee and charges output VAT on its total fee. Counsel's fee is only a disbursement in the narrower situation where counsel acts as the client's own agent, on the client's instruction. We cover the detail, including the long-standing concession and the reverse charge for overseas counsel, in our dedicated guide to VAT on counsel's fees.

Common Mistakes to Avoid

Treating Every Third-Party Cost as a Disbursement

The most frequent error is the assumption that any payment to a third party is automatically a disbursement. It is not. The payment has to pass all eight conditions, and most internal costs of running a matter do not.

Relying on the Old Search-Fee Position

Templates written before 2017 often list searches as VAT-free disbursements. After Brabners and Revenue and Customs Brief 6 (2020), a search you interpret in your advice is part of your taxable supply. Review any standard wording that still treats official searches as automatically outside the scope of VAT.

Confusing the Input Position With the Output Position

"There was no VAT on the cost, so there is no VAT to add" is wrong for a recharge. If the item is part of your taxable supply, your onward charge is standard-rated whatever the input was.

Key Takeaways

A payment is a true disbursement, outside the scope of VAT, only if it passes all eight of HMRC's conditions. Court and tribunal fees, Land Registry registration fees, and SDLT, LBTT or LTT paid for the client are the clean cases. CHAPS fees, the firm's own overheads, and search fees the firm uses in its advice are standard-rated recharges. Since Brabners and Revenue and Customs Brief 6 (2020), the search-fee question turns on how you use the result, not on whether it came by post or online.

The conditions are precise, the burden sits with the firm, and the cost of getting it wrong is a back-dated assessment. If you want a second view on how your firm bills disbursements, or a check of your standard invoice wording, our specialist accountants for solicitors work with this test daily and can help you keep your billing and your VAT returns aligned with your SRA compliance obligations.