VAT: Search fees – uncertainty over disbursement treatment
Legal and other professional services firms will be keenly interested in the recent VAT First Tier Tribunal (FTT) decision in the case of Brabners LLP. The main issue concerned whether search fees involved in the conveyancing process can be treated as a disbursement for VAT purposes when these costs are recharged to the client. The Tribunal agreed with HMRC that in the case in point these recharges were not disbursements and therefore VAT was properly due.
The ordinary business of facilitating conveyancing transactions turned out to be a more complex matter in the case of Brabners LLP. Engaging in conveyancing transactions on behalf of their clients naturally required the firm to purchase online property searches from an external search agency. Brabners LLP had been charged for the cost of gaining access to documents by an external agency and these charges did not include VAT. The solicitors followed suit and recharged their clients for the exact sum incurred and treated this recharge as a disbursement for VAT purposes. In challenging this treatment HMRC were of the opinion that the property search fee could not be treated as a disbursement because it essentially facilitated the conveyancing services supplied by the solicitor to the client. The Tribunal’s conclusion was aligned with HMRC’s view of the property search fee forming an integral part of the “overall” package of conveyancing services provided to the client, and as such, would be regarded as a component part of the overall standard rated supply.
To be or not to be a disbursement?
Generally, fees and other costs cannot be properly deemed to be a disbursement for VAT purposes if the professional services firm and not the end client has effectively received the full benefit of a service from a third party. In procuring a property search fee, or similar, it is important to determine whether the purpose of incurring these costs is to enable the professional services firm to properly perform and meet it’s own wider service delivery obligations, or whether the costs have genuinely been incurred and paid for on behalf and for the benefit of the end client. If the costs are incurred as part of the wider client service package of services and are effectively used and consumed used by the professional firm in the course of the delivery of those services, the recharge of costs simply constitutes a part of the total value of the supply to the client.
What are the implications of the case?
The case could potentially have huge implications for many UK professional services providers, in particularly law firms, in terms of determining whether their recharges are correctly treated for VAT purposes. However, it is noted that the position on local authority searches has changed since 1st January 2017, with HMRC requiring VAT to be charged on CON29 and CON290. Therefore, this should minimise the confusion going forwards.
It is worth noting that HMRC’s published guidance, which was previously agreed with the Law Society, specifically allows for postal searches to be treated as disbursements. The Law Society made representations to the FFT in this particular case which appear to have been largely ignored. It remains to be seen whether this decision will be appealed, which may be difficult given the specific findings of fact, or if HMRC will take this decision as a signal to look to take retrospective action in other cases.
We also understand that the Law Society are considering the position and it is hoped that HMRC will look to produce further guidance to confirm their policy in this area in the near future. However, in the meantime professional firms that may be affected by this decision are urged to review their own internal policies and procedures as a matter of some urgency and to establish the potential exposure involved.
Please contact David McDonnell should you wish to discuss this issue and how your business may be affected.