VAT, disbursements and electronic property search fees

The First Tier Tribunal has ordered a North West law firm, to pay a VAT assessment of £68,000. The recent case of Brabners LLP v The Commissioners for Her Majesty’s Revenue & Customs (HMRC) concerns the VAT liability of electronic property searches procured from a well-known provider, Searchflow. Brabners procured electronic local authority property searches from Searchflow free of VAT, in line with the treatment applied by local authorities. Brabners have recharged this cost to its clients as a disbursement, i.e. with no additional VAT applied.

During a routine VAT inspection HMRC assessed Brabners on the basis that the searches formed only an incidental part of their overall service to its clients, and since the primary supply was taxable, the recharge of the search fees should follow the same VAT 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.Brabners fundamental argument wasThe Law Society 1991 concession from HMRC, which 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 receivesthat service’, therefore, electronic searches should be treated in the same manner. However, Judge McNall rejected this on the grounds that the appeal did not concern whether the postal concession was right or wrong, and he held in favour of HMRC.

What next?

A Law Society spokesman said: “We are considering the implications of this decision for our practice note on VAT and disbursements.”We expect that both The Law Society and The Law Society of Scotland will make further representation to HMRC regarding this decision and it could be appealed to the Upper Tier Tribunal. However, the judge stated in his decision that he could not consider the wider impact of the decision and had to rule on the facts. This may make an industry agreement harder to achieve.

Strictly speaking, First Tier Tribunal decisions have no bearing in law, and do not generally set legal precedent. However, given the significance of this issue, 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.

In the meantime, law firms should consider how to best protect their position. This is likely to involve treating these types of transactions in accordance with HMRC’s view of the correct approach, which is that the VAT liability of the recharge to the client will follow the VAT liability of their overall supply to the client, and thus almost inevitably will be subject to VAT at the standard rate. This will only impact on transactions where VAT has not already been charged on the original cost.

It is also possible to wait to see if the decision is appealed before changing the existing VAT treatment.

Given the significance of this decision, please contact us for further information and we can discuss the implications in more detail.