A recent ruling in the first tier tribunal has gone against law firm Brabners, resulting in an HMRC VAT assessment of £68,000 being upheld. This case should be of significant interest to all law firms providing conveyancing services and recharging fees incurred for property searches.
The case revolves around the treatment of electronic property searches procured from well known provider Searchflow.
Searchflow had provided these services to Brabners free of any VAT, in line with the treatment applied by local authorities, with Brabners passing these costs on to their clients as a disbursement, i.e. with no additional VAT applied.
HMRC assessed Brabners on the basis that the searches formed only an incidental part of their overall service to their clients, and since the primary supply was taxable, the recharge of the search fees should follow the same 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.
A key argument put forward by Brabners and The Law Society was that a 1991 concession from HMRC 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 receives that service’, therefore electronic searches should be treated in the same manner.
This argument was rejected on the basis that the appeal did not concern whether or not the concession for postal searches was right or wrong, and was only looking at the facts of the case.
It is unclear as to whether this case will be appealed to the Upper Tier Tribunal, and The Law Society is currently reviewing the matter before making further comment.
It would be advisable for law firms now to review their current and historic position around disbursements. 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. The safest route in the mean time may therefore be for such searches to be treated as a vatable recharge rather than a disbursement.
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