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VAT and disbursements — SQE1 Accounts question

A worked single-best-answer question on vat and disbursements, with why each wrong option is wrong — the way SQE1 traps candidates.

VAT and disbursements

Fairley Solicitors, which is registered for VAT, instructs counsel to advise in Ms Grant's employment dispute. Counsel sends a fee note for £500 plus VAT of £100, addressed to Fairley Solicitors. The firm holds no money for Ms Grant and pays counsel £600 from office account. The firm treats counsel's fee using the principal method. It later bills Ms Grant for its own costs and counsel's fee.

Which of the following correctly describes the treatment of counsel's fee?

  1. ADebit the full £600 to the office column of Ms Grant's ledger and charge no further VAT on counsel's fee in the bill.
  2. BPay counsel from client account and debit the client column of Ms Grant's ledger with £600.
  3. CDebit £500 to the office column of Ms Grant's ledger and £100 to the HMRC account as input tax, then charge Ms Grant £500 plus output VAT of £100 for counsel's fee in the bill.
  4. DDebit £600 to the office column of Ms Grant's ledger and charge VAT of £120 on counsel's fee in the bill.
  5. ETreat counsel's fee as outside the scope of VAT, debiting £500 to Ms Grant's ledger and nothing to HMRC.
Show answer and reasoning
C is the best answer. Where counsel's fee note is addressed to the firm, the supply is made to the firm, which uses the principal method. The firm pays from office account, recovers the £100 as input tax by debiting the HMRC account, and debits only the net £500 to the office column of the client's ledger. It then treats counsel's fee as part of its own supply, charging Ms Grant £500 plus output VAT of £100 in its bill.

Rule: Under the principal method, the firm pays a VAT-able disbursement from office account, reclaims input VAT, debits the net sum to the client, and charges output VAT on it in the bill.

  • A Debiting the gross amount with no VAT on the bill is the agency method, used where the invoice is addressed to the client. (right rule, wrong facts)
  • B No money is held for Ms Grant, so payment from client account would breach rule 5.3; under the principal method payment comes from office account. (wrong rule)
  • D Debiting the gross £600 and then charging VAT on it would charge VAT twice. (wrong rule)
  • E Counsel's fee is a standard-rated supply and the fee note shows VAT. (wrong rule)

Source: Value Added Tax Act 1994, ss 24-26; HMRC VAT Notice 700, section 25 (disbursements); SRA Accounts Rules 2019, r 5.3

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