VAT Update


Electronic search fees do not qualify as disbursements?


The cost of electronic property searches do not qualify as a disbursement for VAT purposes but should be treated as part of the consideration for the supply of legal services.


That was the result of a recent ruling in the first tier tribunal against North West law firm Brabners, resulting in an HMRC VAT assessment of £68,000 being upheld against them.  This case should be of significant interest to all law firms providing conveyancing services and recharging fees incurred for property searches, but could also have wider repercussions.


The case revolved around the treatment of electronic property searches procured from provider Searchflow. It appears that Brabners were not being charged any input VAT on the electronic searches which they usually obtained through Searchflow. As a result of that they had no input Tax to offset HMRC’s claim for output Tax on the sale.


HMRC assessed Brabners on the basis that the searches formed only an incidental part of their overall service to their clients, and since the primary supply was taxable, the recharge of the search fees should follow the same treatment as their primary supply.


Brabners, who had applied their treatment based on the guidance provided in The Law Society’s Practice Note on the subject, appealed the decision with the backing of The Law Society.


A key argument put forward by Brabners and The Law Society was that a 1991 concession from HMRC confirmed that postal searches could be treated as disbursements as ‘the fee is charged for the supply of access to the official record and it is the solicitor rather than the client who receives that service’, therefore electronic searches should be treated in the same manner.


This argument was rejected on the basis that the appeal did not concern whether or not the concession for postal searches was right or wrong, and was only looking at the facts of the case. It is unclear as to whether this case will be appealed to the Upper Tier Tribunal, and The Law Society is currently reviewing the matter before making further comment.


In our experience at PKF-Francis Clark, many electronic search fees have been charged to law firms ‘plus VAT.’ In cases where this has happened over a number of years a logical approach is to record the gross cost as a disbursement, charging the client the gross cost without accounting for VAT.


In this situation if HMRC do claim for output VAT you would have a claim to input Tax to offset the financial liability. For clarity, in these circumstances it would be beneficial to make it clear on the client’s bill that the amount of the disbursement is the gross amount.


If you are currently charged input VAT but recover it on your VAT return, treating the net amount as a disbursement, you should already be charging and accounting to HMRC for output VAT when you pass that charge onto your client.


What are Disbursements for VAT purposes?


HMRC successfully argued that such items can only be treated as a disbursement with no VAT charged on them by the law firm if it satisfies 8 conditions:


  1. You acted as the agent of your client when you paid the third party
  2. Your client actually received and used the goods or services provided by the third party (this excludes the agents travel, and expenses, phone bills, postage and other costs being treated as disbursements)
  3. Your client was responsible for paying the third party e.g. SDLT or other taxes, most court and Land Registry fees
  4. Your client authorised you to make a payment on their behalf
  5. Your client knew that goods or services you paid for would be provided by a third party
  6. Your outlay will be separately itemised when you invoice your client
  7. You recover only the exact amount which you paid to the third party
  8. The goods or services that you paid for are clearly additional to the supplies that you make to your client on your own account.


As well as postal property searches, there are other exceptions to this, such as counsel and medical examination fees. It would be advisable for law firms now to review their current and historic position around disbursements.   It is possible that HMRC may now look to target law firms for an under-declaration of VAT in relation to the recharge of search fees to their clients. PKF- Francis Clark can advise if you are unsure of the position.


What should you do now?

  1. Check what searches you are completing on which you are not charged VAT. Are they a significant value per annum? That gives an indication of your possible exposure.
  2. Review your procedures for accounting for such costs and VAT. We would expect that where you are charged VAT and recover that as input tax then you should only be treating the net as a disbursement and should generally be applying output VAT when you charge it to your client.
  3. If the postal search concession does not apply, the current rule is that you should be charging output tax on any disbursements for property, people locators, solicitor or bank searches/checks or similar where they are used as part of the service or advice you give to your client.
  4. Maintain awareness for any future announcements arising from this case.
  5. Get expert advice, if you are to treat these as taxable supplies then you would be entitled to recover any input tax charged to you.

This publication is produced by Francis Clark LLP for general information only and is not intended to constitute professional advice. Specific professional advice should be obtained before acting on any of the information Contained herein. Whilst Francis Clark LLP is confident of the accuracy of the information in this publication (as at the date of production), no duty of care is assumed to any direct or indirect recipient of this publication and no liability is accepted for any omission or inaccuracy.

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