Ensuring Disbursement Costs Are Billed at the Right Tax Rate

In this article:

• Choosing Tax Rates with Soft Costs and Anticipated Disbursements 
• Choosing Tax Rates for Hard Costs
• Common Tax Expenses Scenarios

Firms must bill clients for their costs, but the VAT/GST/tax paid on those costs may differ from the VAT/GST/tax charged to the client. Settings within Actionstep Practice Management can help you meet your tax obligations when billing on these costs.

Choosing Tax Rates with Soft Costs and Anticipated Disbursements 

For instructions on creating a disbursement, see Entering Disbursements and Working with Anticipated Disbursements.

When entering soft costs or anticipated disbursements,  you can select a specific tax code from the tax code drop-down list or you can leave it set to Default, which pulls the tax rate from the matter's Billing Options (which you can access by viewing the matter, clicking the Billing menu icon, and clicking Matter billing options).

Choosing Tax Rates for Hard Costs

In Actionstep, you use general ledger accounts to control how hard disbursements will be taxed. When a firm withdrawal or supplier invoice creates a disbursement, Actionstep uses the expense account for that line item and uses that account’s settings.

You can adjust this disbursement tax setting in the expense and cost of sale account in the Accounts list.

To do this:

1. In Practice Management, go to Accounting > Accounts > Account List. The Account List page appears.
2. Click the Display drop-down list and choose Master Accounts. The list is updated to show your primary accounts.
3. Find the expense account you want to edit and click its name.The Edit Account window appears.
4. In the Financial details section, click the Disbursements tax drop-down list.
   
5. Choose from the following options:
   • Use matter settings: Choose this option to use whatever tax code is set for the matter's billing options for the disbursement. (See Setting Up Billing for a Specific Matter and make these adjustments in the GST/VAT/Tax section).
     NOTE:  Even if the GST/VAT/Tax applies on setting in the matter's Billing Options is set to apply GST/VAT/Tax to Fees only, the rate will be applied to the disbursement created.
   • Use line item tax code: Choose this option to use the same tax rate as the line item in the supplier invoice or firm withdrawal that the disbursement was created from. 
   • [Choose a specific tax code from the drop-down list]: Choose one of the existing tax options in the list. When choosing one of these options, the disbursement will use the nominated tax code regardless of what tax code is used in the line item or settings on the matter. 
6. Click Save to save your changes. 

Common Tax Expenses Scenarios

Below are some common scenarios for how a firm might need to accommodate taxing expenses that are billed on.  

Scenario: In most cases, you want to bill costs at the same tax rate as they were supplied to you but occasionally you need to bill at a zero rate, regardless of the tax on the supply

It's recommended you create two separate expense accounts for disbursements: 

• Disbursement costs
• Disbursement costs – enforce no tax: 

The Disbursement costs account can be configured to use the same tax rate as the line item, while the Disbursement costs - enforce no tax account applies no tax rate.  

For the most part, your staff will use the Disbursement costs expense account for supplier invoices or firm withdrawals. They can enter the expense taxed as they have received it, and it will create a disbursement with the same tax. However, when they need to bill the cost at no tax, even if the supplier taxed the item, they can use the Disbursement costs – enforce no tax expense account. 

Scenario: In most cases, you want to bill costs at the same tax rate as they were supplied to you but occasionally you need to bill on at a non- zero rate, regardless of the tax on the supply 

This is permissible by the HMRC for UK customers if the act of meeting the expense on behave of the customer is seen as a service. Even if the supply was at no tax, the item can be billed on.  

It's recommended you create two separate expense accounts for disbursements: 

• Disbursement costs 
• Disbursement costs – enforce tax 

The Disbursement costs account can be configured to use the same tax rate as the line item, while the Disbursement costs – enforce tax account applies a specific tax rate.  

For the most part, your staff will use the Disbursement costs expense account for supplier invoices or firm withdrawals. They will enter the expense taxed as they have received it, and it will create a disbursement with the same tax. However, when they need to bill the cost at tax, they can use the Disbursement costs – enforce tax expense account. The supplier invoice or firm withdrawal should be entered with amounts excluding tax if you want the tax you charge to be additional to the total cost from the supplier. 

Scenario: In most cases, you charge tax on all disbursement costs but occasionally have an overseas customer you cannot charge VAT/GST to 

In this case, it's recommended you set your your expense accounts to use the matter’s tax settings. When you have a matter for an overseas client, you can change the tax code on that matter as no tax or other appropriate tax code and all the disbursements for that matter will be billed at no tax. All other matters will be taxed at your standard rate. 

Related Articles:

• Entering Disbursements
• Working with Anticipated Disbursements
• Understanding Disbursements
• Working with Tax Codes and Rates (Admin)