Every law firm passes third-party costs on to clients — searches, court fees, Land Registry fees, counsel, experts. Whether those recharges carry VAT is one of the most frequently mis-handled questions in legal practice finance, and the stakes were made very clear in Brabners LLP v HMRC [2017] UKFTT 666 (TC), where a law firm was assessed for roughly £68,000 of VAT on electronic property search fees it had treated as VAT-free disbursements. The tribunal sided with HMRC. Here's the principle, the case, and a practical sorting of the common items.
The Principle: Agent or Ingredient?
A payment qualifies as a disbursement — passed on outside the scope of VAT — only when your firm acts as a mere agent: the goods or services were supplied to your client, not to you, and you simply handled the money. The conditions (all of them must be met) are set out in section 25 of VAT Notice 700 and summarised in HMRC's guidance on costs passed to customers. In essence:
- You acted as agent for your client when you paid the third party
- Your client actually received and used the goods or services
- Your client was responsible for paying the third party, knew the supply was made by them, and authorised the payment
- You itemise the cost separately and recover the exact amount — no markup
By contrast, if you obtain something in order to do your own job — information you use to advise — that cost is an ingredient of your legal service. Recharging it to the client is just part of your fee, and it carries 20% VAT even if you itemise it separately and add no markup.
What Brabners Decided
Brabners paid for electronic property searches in conveyancing transactions and passed the cost to clients without VAT, as disbursements. The First-tier Tribunal held that the searches were supplied to the firm, which used the results to advise its clients and progress the transaction — the classic "ingredient of the service" analysis. The fees therefore formed part of the consideration for the firm's own taxable supply of legal services, and output VAT was due. The decision confirmed a long line of authority (including Rowe & Maw v C&E) and remains the reference point for search fees today: if you read it, interpret it, or act on it for the client, it's almost certainly not a disbursement.
Sorting the Common Items
| Item | Usual treatment | Why |
|---|---|---|
| Local authority / electronic search fees | VATable recharge | Brabners — used by the firm to advise |
| Land Registry registration fees | Disbursement | Registration is the client's own statutory obligation; firm pays as agent |
| Court / probate fees | Disbursement | The litigant's own fee, paid on their behalf |
| Stamp Duty Land Tax | Disbursement | The client's own tax liability |
| Counsel's fees | Either | By long-standing concession, the firm may treat counsel's fee invoice as redirected to the client (a disbursement); otherwise it's a VATable cost of the firm with input VAT recovery |
| Expert reports obtained to advise | Usually VATable recharge | Same logic as searches — facts depend on who the report is really for |
| Travel, mileage, courier, photocopying | VATable recharge | Costs of doing your own job — never disbursements |
Why Getting It Wrong Is Expensive
Treating a VATable recharge as a disbursement understates output VAT on every matter. HMRC can assess four years back, with interest and potential penalties — and for a conveyancing practice doing thousands of transactions, small per-matter amounts compound into Brabners-scale liabilities. The reverse error wastes money too: genuine disbursements wrongly standard-rated either inflate client bills or eat margin, and input VAT on items like counsel's fees goes unrecovered.
Practical Steps for Your Firm
- Maintain a firm-wide disbursement schedule — one agreed VAT treatment per cost type, applied by everyone, reviewed annually
- Configure your practice management system so fee earners can't override treatments ad hoc
- Check the section 25 conditions, especially "exact amount" — any rounding or markup destroys disbursement treatment
- Document the counsel's fee concession choice and apply it consistently
SMD Accountancy helps law firms review disbursement schedules, quantify historic exposure, and correct treatment before HMRC raises it. If your firm's last review predates Brabners, book a free call — an afternoon's review is considerably cheaper than a four-year assessment.