While we are awaiting the Law Society’s considered reaction to the HMRC’s position on the VAT debate, the beleaguered law firm is still pondering about what we ought to be doing in the current uncertain climate.
We all would want to be seen to be doing the correct thing. That would appear to be charging VAT to clients on all the monies we spend for them – searches, counsel’s fees, experts’ fees, bank charges, et al – which we cannot properly call ‘disbursements’ in the aftermath of the Brabners’ decision.
However, in the absence of any clear steer from anyone, many firms are left to decide what to do.
To do nothing risks exacerbating an existing problem of undercharging VAT and the levying of a notice by HMRC requiring us to account for back-VAT which we have not, but should have been, charging.
The other alternative is to simply charge VAT on everything going forward, possibly increasing the VAT liability on the client. This latter option is currently the preference of many firms.
However, simply to charge VAT in the future on something that we have not been charging it on in the past – without more – is tantamount to an admission that what we had been doing before was incorrect – and that we owe HMRC the (uncollected) VAT.
Neither of these solutions is ideal and the HMRC are waiting for someone to admit their past mistakes and are biding their time before pursuing another claim, lest the Tribunal takes a different view from before.
So what should firms do?
A change in the T&Cs should acknowledge the Brabners’ judgement and rectify the position for the future, without compromising the firm’s past activity.
Instead of saying “we will also be incurring disbursements on your behalf, such as searches etc”, instead say “we will also be incurring expenses in connection with your matter, for example in relation to searches etc”. This formulation will avoid any confusion as to the status of the payments and enable us to charge VAT to the client as part of our overall service to them, in line with the Tribunal decision.
It also leaves open the question of whether what we had been doing previously was wrong, or not. Provided it was in accordance with the old Law Society guidance note, I would argue that it was the correct position – and I would put the HMRC to proof of the point in any case of dispute.
As for the future, we are charging VAT on everything we should be – and will have accounted for the VAT on our quarter-end returns, as we should be doing.

Trevor Hellawell
Solicitor
ExL Practice Development
07850 56 26 99