Disbursements
Solicitors Accounts > Disbursements
Most SQE1 candidates incorrectly add VAT to agency disbursements or pay them from the wrong account. The agency vs principal test is straightforward—"who is liable to the third party?"—but examiners test it repeatedly because candidates rush.
What Is Disbursements in SQE1?
Disbursements covers payments made to third parties on behalf of clients (court fees, search fees, expert reports) and the critical distinction between agency and principal disbursements. This distinction determines which account pays the disbursement, whether VAT is charged on recharge to the client, and the accounting entries. You need to apply the key test: "Who is liable to the third party?" If the client is liable, it's agency (firm is merely a conduit). If the solicitor is liable, it's principal (solicitor is the client to the third party). Agency disbursements (court fees, Land Registry fees, searches) have NO VAT on recharge and are paid from the client account. Principal disbursements (expert reports where solicitor instructs) attract VAT on recharge and are paid from the business account initially. For SQE1, this topic is tested frequently and the VAT trap catches many candidates.
Key Principles for SQE1
- The "liable to third party" test: Determine who the third party would look to for payment. If the client, it's agency; if the solicitor, it's principal. This test resolves most scenarios.
- Agency disbursement VAT treatment: NO VAT is added by the solicitor when recharging to the client. The disbursement is outside the scope of VAT in the solicitor's hands.
- Principal disbursement VAT treatment: VAT IS charged when recharging to the client because the solicitor is making a supply. The solicitor can also reclaim input VAT.
- Account payment source: Agency disbursements are paid from the client account (client's money, client's liability). Principal disbursements are paid from the business account (solicitor then reclaims via transfer when billed).
Exam tip
Apply the 'who is liable to the third party?' test — if the third party would look to the client, it's agency; if to the solicitor, it's principal. Agency disbursements (court fees, Land Registry fees, search fees): paid from client account, NO VAT added on recharge, debit client ledger (client side). Principal disbursements (expert reports where solicitor instructs): paid from business account, VAT charged on recharge, then transfer from client account when billed. The VAT treatment is the most commonly tested trap — agency disbursements are outside the scope of VAT in the solicitor's hands.
How This Appears in SQE1 Questions
SQE1 questions present a list of disbursements and ask you to classify each as agency or principal, determine the correct VAT treatment, or identify which account the payment should come from. The most common trap is applying VAT to an agency disbursement - agency disbursements are outside the scope of VAT in the solicitor's hands. Watch also for questions asking which account is debited - agency disbursements come from the client account, principal disbursements from the business account.
Quick Example Scenario
A solicitor acting in a property transaction pays a Land Registry fee of £300 and an expert surveyor's fee of £1,200 (plus VAT). The surveyor was instructed by the solicitor in the solicitor's own name. The Land Registry fee is an agency disbursement - the fee is payable by the client to the Land Registry, and the solicitor pays it on the client's behalf. It should be paid from the client account and no VAT is added when recharged to the client. The surveyor's fee is a principal disbursement - the solicitor instructed the surveyor as principal. The solicitor pays from the business account, reclaims input VAT, and then recharges the cost to the client plus VAT.
Common Mistakes Students Make
- Adding VAT to agency disbursements - agency disbursements are outside the scope of VAT when recharged to the client.
- Paying agency disbursements from the business account - they should be paid from the client account because they are the client's expenses.
- Failing to apply the 'who is liable to the third party?' test to determine whether a disbursement is agency or principal.
- Confusing the VAT treatment: principal disbursements attract VAT on recharge; agency disbursements do not.
Quick Summary
- Agency disbursement: solicitor pays third party as client's agent; supply is from third party to client; solicitor is merely a conduit (court fees, Land Registry fees, search fees, SDLT)
- Principal disbursement: solicitor obtains supply in own name and passes cost to client; supply is from third party to solicitor, then solicitor supplies to client (expert reports where solicitor instructs as principal)
- Key test: who is liable to third party? If client, it's agency. If solicitor, it's principal.
- VAT on agency disbursements: VAT NOT added by solicitor when recharging to client; disbursement is outside scope of VAT in solicitor's hands
- VAT on principal disbursements: solicitor charges VAT when recharging to client because solicitor is making a supply; solicitor can reclaim input VAT
- Accounting for agency: paid from client account. Debit client ledger (client side), credit client cash account.
- Accounting for principal: paid from business account. Debit business cash account, credit expense account - then transfer from client to business when billed
- Undisclosed markups on disbursements are a breach of professional obligations (duty to act with integrity)
Want to test this now? Try a few SQE1-style questions below before moving on.
Test Yourself
Test yourself
Quick check questions based on this article.
Question 1
Scenario
A solicitor is acting for a client in a personal injury claim. The solicitor instructs a medical expert to prepare a report on the client's injuries. The medical expert's fee is £1,800 plus VAT at 20%. The expert addresses the invoice to the solicitor's firm, and the firm is liable to pay the expert's fee regardless of whether the client reimburses the firm. Separately, the solicitor also needs to obtain medical records from the client's GP surgery. The GP surgery charges an access fee of £50, which is invoiced directly to the client. The solicitor pays the £50 from the client account on the client's behalf. The solicitor's accounts trainee is preparing the client ledger entries and is unsure how to classify each disbursement. The trainee notes that the firm previously treated all third-party payments as agency disbursements. The solicitor has not yet delivered a bill to the client. The client provided £5,000 on account of costs and disbursements at the outset of the matter.
Which of the following correctly classifies the two disbursements for the purposes of VAT and the client ledger?
Question 2
Scenario
A solicitor at Nelson & Kerr acts for a client in a residential conveyancing matter. The solicitor needs to carry out a local authority search at a cost of £150. The search fee is payable directly to the local authority by the firm. The local authority invoice is addressed to the firm. The solicitor pays the £150 from the firm's office account using the principal method of accounting. The solicitor then records the payment as an office account disbursement on the client's ledger. Separately, the solicitor instructs a drainage company to carry out a drainage search at a cost of £45. The drainage company's invoice is addressed to the client. The solicitor pays the £45 from the client account using the agency method of accounting. The solicitor records the payment as a client account disbursement on the client's ledger. The firm's office manager has recently implemented a new electronic payment system. The client has provided funds on account of £5,000 which are held in the client account.
Which of the following best describes whether the solicitor has correctly applied the agency and principal methods of accounting for the disbursements?
Question 3
Scenario
A solicitor acts for a client in a complex commercial transaction. Over the course of the matter, the following events occur: Week 1: The solicitor receives £30,000 on account from the client into the client account. Week 2: The solicitor pays a Companies House search of £5 (invoiced to client) from the client account, and instructs an environmental consultant who invoices the firm for £1,000 plus VAT (£1,200 total). The solicitor pays the consultant from the business account. Week 3: The solicitor receives a commission of £100 from the environmental consultant under a referral arrangement. The solicitor does not disclose this to the client and retains the commission in the firm's business account. Week 4: The solicitor renders a bill showing professional fees of £10,000 plus VAT (£2,000) and the environmental search as a principal disbursement of £1,000 plus VAT (£200). The solicitor transfers £13,200 from client to business account. Week 5: During the five-weekly reconciliation, the accounts team discovers that the solicitor failed to include the commission disclosure on the bill. The compliance officer reviews the entire file.
How many distinct regulatory breaches or compliance issues can be identified in this scenario?
Practice with full exam-style questions
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Practise Disbursements Questions for SQE1
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