Law firm disbursements on e-invoices: 2029 guide

Disbursements are the professional-services question for the 2029 mandate. HMRC lets you leave a genuine disbursement out of the VAT calculation, as long as it is itemised separately on the invoice. Turning that into a structured e-invoice is not straightforward. The European standard behind Peppol does not let you mix "not subject to VAT" lines with standard-rated fees on one invoice, and the UK has not yet confirmed how disbursements should be coded. Here is what the rules say today, where the friction lies, and what to do before 2029.

Who is in scope

From April 2029, VAT invoices issued between VAT-registered businesses (B2B) and to public bodies (B2G) must be e-invoices. For a law firm, accountancy practice, consultancy or agency, that means:

• Corporate and commercial clients that are VAT-registered: likely in scope
• Public-sector clients (councils, NHS, departments): in scope
• Private clients such as conveyancing, wills, family and personal injury work: B2C, and not expected to be covered

Many firms bill both, so plan for two invoice routes.

What counts as a disbursement for VAT

HMRC's guide VAT: costs or disbursements passed to customers and VAT Notice 700 (section 25) set eight conditions, all of which must be met:

1. You acted as your client's agent when you paid the third party.
2. The client received, used or had the benefit of the goods or services.
3. It was the client's responsibility to pay.
4. The client authorised you to pay.
5. The client knew the goods or services came from a third party.
6. The cost is shown separately on your invoice.
7. You pass on the exact amount paid.
8. The goods or services are clearly additional to your own supply.

HMRC's examples of costs that are not disbursements:

Cost	Disbursement?	Why
Bank fee for a telegraphic transfer to or from your own client account	No	Supplied to the firm, not the client
Personal search of official records to advise the client	No	The firm receives the information to give advice
Postal search obtaining a document for the client	Can be	The firm just obtains a document on the client's behalf
Your air fare or travel to see the client	No	Supplied to you; a recharge, so VAT applies
Your own postage and phone	No	Normal business costs

HMRC also notes that treating a payment as a disbursement is usually only worth it where the third party charged no VAT, or the client cannot reclaim VAT.

HMRC's worked example

Notice 700 shows how the invoice should look. It covers services of £80, non-disbursement expenses of £20 and a qualifying disbursement of £50:

Line	£
Services	80.00
Expenses (recharge)	20.00
Value for VAT	100.00
VAT at 20%	20.00
Disbursements	50.00
Total	170.00

Where e-invoicing gets awkward

In a paper or PDF invoice, the disbursement simply sits below the VAT line. In an EN 16931 invoice, which Peppol BIS Billing 3.0 is based on, every line must carry a VAT category code, and the totals must add up exactly. The options all have problems:

• "Not subject to VAT" (category O) fits the idea best, but rule BR-O-11 says an invoice with an "O" VAT breakdown "shall not contain other VAT breakdown groups". You cannot combine it with standard-rated fees on one invoice.
• Exempt (E) or zero-rated (Z) would misdescribe the disbursement. It is not your exempt or zero-rated supply at all, and it would sit in your VAT return as one.
• A separate invoice for disbursements solves the coding but changes billing practice, and you need to think about how that document is treated.
• Leaving disbursements off the invoice and requesting them separately breaks HMRC's condition that they are itemised on your invoice.

None of these is confirmed as the UK approach. The government's consultation response says its technical work will include "designing potential extensions to the standardised invoice to accommodate sector specific needs". Disbursements are an obvious candidate. See UK VAT category codes in Peppol.

Confidential billing detail

Narrative-heavy bills are another issue. An e-invoice is structured data that flows into the client's finance system, so line descriptions may be read by more people than a partner's covering letter would be. The consultation response noted respondents' concerns about how data will be stored, shared and used, "particularly in sensitive sectors like legal services and healthcare".

Practical steps:

• Keep the VAT invoice description sufficient to identify the services, as Notice 700 requires, without privileged detail.
• Put detailed narrative in a separate attachment or matter report where the client accepts that. See invoice attachments in Peppol.
• Agree a client buyer reference or matter number so invoices route to the right approver. See buyer reference.

Many large corporate clients already ask law firms to submit bills through e-billing or legal-spend platforms. Those platforms are not necessarily connected to Peppol, which the government has announced as the core network for UK e-invoicing. How such platforms will sit alongside the mandate is not yet confirmed. HMRC's current guidance also warns against running dual paper and electronic invoice systems for the same supplies, outside a controlled trial.

Other professional-services points

• Interim and final bills. Each VAT invoice creates a tax point when issued in advance of completion. Make sure interim bills that are VAT invoices go out as e-invoices, and that requests for payment on account are clearly not VAT invoices.
• Credit notes and write-offs. Fee reductions after billing need structured credit notes referencing the original invoice. See credit notes in Peppol.
• Third-party payers. Where an insurer or another party pays the bill but the client receives the service, check who the VAT invoice must be addressed to before setting up Peppol routing.
• Foreign clients. Services to overseas business clients are often outside the scope of UK VAT. The mandate is about domestic VAT invoices. See invoicing EU customers.

What to do now

1. Audit your disbursement codes against HMRC's eight conditions. Many firms find recharges filed as disbursements, and errors like that will surface quickly in structured data.
2. Separate B2B and B2C billing in your practice-management system.
3. Ask your practice-management provider how it will handle disbursements under BR-O-11, and how it plans to connect to Peppol.
4. Review standard bill narratives for confidentiality.

Accountants advising clients should also read the guide for accountants. This is general information, not tax advice. Follow HMRC's guidance for specific cases.