Profit costs, disbursements and expenses – Preparing Compliant Bills – The Law Factory
Legal billing can be a minefield and when drawing a bill for your clients, you need to be very careful about what is being billed and whether or not to apply VAT to each item. It is crucial to understand each legal billing element and there are three main areas: Profit Costs Disbursements Expenses Profit […]
Legal billing can be a minefield and when drawing a bill for your clients, you need to be very careful about what is being billed and whether or not to apply VAT to each item.
It is crucial to understand each legal billing element and there are three main areas:
- Profit Costs
- Disbursements
- Expenses
Profit Costs
“Profit costs” are straight-forward, as they are simply the costs of the solicitor’s time billed to the client with VAT applied to it. It is however important to ensure that the bill and supporting documentation show clearly what the costs are covering. Transparency is crucial to the SRA with no hidden costs so that the client understands exactly what they are being charged for. Luckily, new case management systems can assist with this by including the time recording elements in the bill if required.
Disbursements
Disbursements on the other hand can be difficult to determine. Ever since the case between HMRC and Brabners, they have been scrutinised and it is very important to get the VAT applied correctly.
A “disbursement” in the true sense of the word is a service which has been charged for by a third party and is then passed on directly to the client without further input from the solicitor/solicitor’s practice. Anything else quite simply forms part of the service provided by the firm and should be shown as such.
An example of a disbursement is a payment to a barrister for counsel fees. The barrister provides the service, which is highly likely to be VAT applicable. This is then added to the solicitor’s invoice after receiving the final fee-note from the barrister and is charged to the client accordingly as a disbursement. The key here is that the service itself is provided by the barrister not the solicitor. The amount passed onto the client must be exactly the same as that charged by the third party and the third party must be aware that the service they are providing is for the client, not the law firm.
An example of what was previously thought a disbursement is a land registry search such as a local land charge search or searches undertaken by a digital search company. Whilst the searches are undertaken by the search company and the reports are passed to the solicitor, it is the solicitor who interprets the results of the search and advises the client. This therefore forms part of the solicitor’s service and should therefore show in the profit costs section of the invoice and have VAT applied regardless of whether VAT was charged by the search provider to the solicitor. These elements should be clearly defined on the bill so that it is clear to the client what they are paying for.
Expenses
Expenses have also been misrepresented in the past and shown as disbursements. They do not fall in the same category as disbursements. Items such as postage, travel expenditure and bank charges are all deemed by HMRC as part of the service to the client and therefore should be treated as such. All items deemed as expenses cannot be shown as disbursements without VAT and must show on the bill as expenses which are part of the service and have VAT applied.
When raising an invoice to your clients I would recommend putting procedures in place to catch the disbursements and expenses ensuring that they are handled correctly. If you use a case management system to generate your bills, set the parameters so that when the bill is rendered the correct items fall into the correct section and ensure that the accounts are posted correctly so that the correct VAT rate and amount is applied.
Summary
To summarise, here are the elements to think about in legal billing when determining if a rechargeable item is a disbursement:
- Did the third party/supplier act on behalf of the client?
- Did the client receive the benefit of the service from the third party?
- Were you given permission by the client to pay the supplier?
- Did the client know that the services were from another supplier?
- Are you passing on the exact cost to your client?
- Are these costs in addition to your own costs of service?
I recommend reviewing all items currently treated as disbursements and asking the above questions. The firm may well require a slight restructure in procedures to accommodate a change in legal billing to comply with SRA and HMRC regulations.
Alex Simons
New Business Manager
The Law Factory LLP
20/10/2020
