FLK2 · Solicitors Accounts

VAT & disbursements in accounts

SQE1 revision notes — the key rules, leading cases and common traps for this topic, in plain English and current to 2026.

SA.06 — VAT & Disbursements in Solicitors' Accounts (FLK2)

Governed by the SRA Accounts Rules 2019 plus general VAT law (VATA 1994). The core skill is classifying a payment correctly, because that classification dictates whether VAT is charged and whether the entry touches the client account or the business account.

Disbursements: the two types

A disbursement is a payment the firm makes on the client's behalf. There are two classes, and confusing them is the classic trap.

Agency / "true" (VAT-disbursement) — no output VAT added by the firm. The supply is made to the client, not the firm; the firm merely passes on the cost. Conditions (from HMRC's tests): the client received the supply, the firm acted as the client's agent, the client was responsible for paying, and the firm recovers the exact amount with no mark-up. Examples: court fees, Land Registry fees, stamp duty/SDLT, Companies House fees. These are usually outside the scope of, or exempt from, VAT.
Non-agency disbursement — part of the firm's own supply. The expense is incurred by the firm for its own service and re-billed. The firm adds VAT at the standard rate (20%) on top. Example: a travel cost or a search done as part of the firm's own work.

Paying disbursements: the money rules

Pay from client money only if the firm holds enough of that client's money — you cannot create a debit balance on a client ledger (Rule 5.3 / no overdrawn client accounts).
If client funds are insufficient, pay from the business account (firm funds), then recover from the client.
A payment of a disbursement for which the firm has already received an invoice addressed to the client can be treated as the client's debt; an invoice addressed to the firm is the firm's expense (relevant to the agency/non-agency split and input VAT recovery).

VAT on the firm's professional fees

The firm's own bill (profit costs) carries output VAT at 20% if the firm is VAT-registered (registration threshold £90,000 turnover). VAT charged is business money: it goes to the business account. Never bank professional fees + VAT into client account.

Common traps to nail

Agency disbursement = NO VAT added by the firm; non-agency = VAT added. Court fees and SDLT are agency (no VAT); travel is non-agency (add VAT).
VAT element is always business money — receipts for fees-plus-VAT go to business account, not client account.
Do not overdraw a client ledger to fund a disbursement.
Re-charging at a mark-up destroys true-disbursement treatment — output VAT then applies.
Invoice addressed to the firm (not the client) signals a non-agency disbursement and the firm reclaims input VAT itself.

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