Is the recharge of the cost of a medical report in support of a personal injury or medical negligence claim a disbursement or is it part of the cost of giving the legal advice?
The answer is important because it will determine the VAT treatment.
- If the cost is a disbursement, incurred as agent for the client, the solicitor should not add VAT when including the cost in his invoice.
- On the other hand, if the cost is incurred by the solicitor in the course of providing legal advice, VAT must be added.
On 20 January 2011, in the case of Barratt, Goff and Tomlinson v HMRC MAN/2009/0219, the Tax Chamber of the First Tier Tribunal found in favour of the taxpayer – the cost of obtaining medical records and a medical report incurred in support of the client’s claim was a disbursement and the firm was correct not to add VAT in respect of the recharge of cost.
HMRC has until the middle of March to appeal this decision and we will not be certain of the position before then.
You may be aware that the Law Society has supported an appeal by a Nottingham firm against an HMRC claim that it was part of the cost of supplying legal advice and therefore VAT should be charged.
However until a higher court reverses this decision on appeal, provided that the cost of obtaining such records and reports otherwise qualifies as a disbursement, in future it should be accounted for as such and excluded from the invoice value on which VAT is charged. The general test for a disbursement is that it should meet all the following conditions:
- the solicitor acted for his client when paying the third party; and
- the client actually received and used the goods or services provided by the third party; and
- the client is responsible for paying the third party; and
- the client authorised the agent to make the payment on his behalf; and
- the client knew that the goods or services would be provided by a third party; and
- the solicitor’s outlay must be separately itemised when invoicing the client; and
- the solicitor must recover only the exact amount paid to the third party; and
- the goods or services must be clearly additional to the supplies made to the client on the solicitor’s own account.
We will be monitoring developments but if you would like to discuss individual cases, please contact me.
Kind regards,
Andrew
Andrew Allen
Partner
This email was sent for and on behalf of Winter Rule LLP
Email: aallen@winterrule.co.uk