On 8 October 2019, the Law Society released its long-awaited practice guidance note for VAT in response to the ruling against Brabners back in 2017. In that case, the judge decided that the electronic property searches in question were supplied to the law firm which, in turn, used those searches to advise their clients. On that basis, HMRC had argued that those searches were part of the overall service provided by the law firm, and therefore could not be treated as disbursements for the purposes of VAT.
It seems that the Law Society are still unconvinced by the ruling, stating ‘we consider that there remains scope for criticism of such narrow interpretations [of what constitutes a disbursement], but these judgements cannot be ignored’.
Essentially, unless:
- You are making a payment for which the client is ultimately responsible themselves;
- The supplier is aware that their service is being provided to the client; and
- You have passed the search/report/etc. to the client without review and comment,
this would not fit the definition of a disbursement. In other words, if you use the information received in order to advise your client, you will not be able to adopt the disbursement treatment for VAT. The note does give some specific examples, particularly in relation to conveyancing transactions.
It is important to remember that this will only have an impact on those clients who are not VAT registered and on supplies that did not include VAT when incurred by the law firm. If you are in doubt, it would be prudent to include the charges on your invoices as recharges and apply VAT. If you are found to have applied the disbursement treatment inappropriately, you could potentially be liable for the additional VAT, interest and penalties.
Despite how long the Law Society has taken to release this guidance, it is disappointing that there does not appear to have been more definitive guidance sought from HMRC in order to provide law firms with practical advice. In fact the note specifically states that it ‘has not been discussed or agreed with HMRC’ and leaves the Law Society assuming no responsibility for any guidance given.