Following a recent Tribunal decision, the leading North-West law firm Brabners faces a £68,000 VAT bill for electronic local authority property searches it procured from an agency, after the tribunal ruled that they should not have been treated as disbursements, notwithstanding that Brabners was supported by the Law Society in presenting its case.
The Law Society’s view, as set out in its practice note on VAT and Disbursements, which is contained on its website, is as follows:
“(b) Local Authority search fees
HMRC's view is that fees for local authority searches are subject to VAT when you charge them to your client. However, historically by concession, they are prepared to allow solicitors to treat postal search fees as disbursements so that VAT will not be payable on the amount of the fee which should thus be shown separately on your bill. At present HMRC contend that this concession does not apply to local authority searches that are requested and received electronically.
The Society's view is that provided conditions (a) - (e) in 3.2 above are met all fees for local authority searches, whether obtained by post or electronically, can be treated as a disbursement. This will be so, even where the search form is submitted by post and the result received electronically or where the search is requested electronically and the result posted back.
The conditions (a) – (e) which are referred to are as follows:
a) Your client should have either requested that you obtain the service on their behalf or authorised you to do so.
b) In the case of a report or a search result, the final report should be sent to your client either by you or the supplier. You can retain a copy.
c) The amount you charge your client should be exactly the same as the amount charged to you by the supplier.
d) The expense should be separately itemised on the invoice you send to your client.
e) The supplier should be aware that the service is being provided to a third party, i.e. your client.
To comply with (b) you should give the original report to your client. Where this is not possible, for example the original search report must be provided to a mortgage provider or an original medical report must be made available to the court in a personal injury action, you must give a copy of the report to your client.
To comply with (e) you should tell the supplier the identity of your client. Where your client does not wish their identity to be revealed or the process involved (such as electronic form submission) does not enable your client's identity to be communicated to the supplier, you should provide the supplier with some identifying feature such as a client and/or file reference number.”
It is in relation to condition (b) that HMRC and the Law Society disagreed. The Law Society believed that, provided that the report or search result was given to the client, that was sufficient for the disbursement treatment to apply (provided the other conditions were met), even if the solicitor then used the report or search result to assist in providing advice to their client. The Law Society considered that the act of obtaining the search results and the subsequent use of them by the solicitor to prepare a report were “conceptually different”.
HMRC’s opposing view was that if the information from the report or the search result was used by the solicitor to provide advice, then the service had been provided to them and not to their client, and therefore the disbursement treatment was not available.
In an earlier case (Barratt, Goff & Tomlinson), the Tribunal had agreed with the Law Society viewpoint, but in the Brabners case the judge rejected the Law Society’s argument, stating that he could not “readily identify the ‘concept’ that was said to be different”. He concluded that when Brabners obtained search results, and prepared a separate report on them, it was using that information “as part and parcel of its overall service”.
The Judge drew a distinction between the medical records that were the subject matter of the Barratt case, and the search reports in the instant case, on the basis that the client could be viewed as the “owner” of the medical records and the solicitor could only obtain access to those records with his client’s consent.
The Law Society have said that they are considering the implications of this decision for its practice note on VAT and Disbursements. It is not known whether there will be an appeal to the Upper Tribunal. 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, we would be surprised if it did not open the door to further attacks from HMRC.
In the meantime, you have to protect your position, and that will 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 customer will follow the VAT liability of your overall supply to the customer, and thus almost inevitably will be subject to standard-rate VAT. This will only impact on transactions where VAT has not already been charged on the original cost. There should not be any cost to the practice, as it is the client that will suffer the additional VAT.
Based on the Tribunal’s analysis of the position, it is hard to conceive of any situation where you could pass on the cost of an electronic search as a VAT-free disbursement to your client.
For more information, and to check that you are treating property search fees correctly, please contact our in-house VAT experts, Julian Millinchamp
and Andy Connolly