By David Owens
Hawsons Chartered Accountants
THE Brabners LLP V HMRC First Tier Tribunal (FTT) case involved whether electronic, local authority search fees paid to Searchflow (a specialised online search agency) by Brabners were to be treated as disbursements paid on behalf of their clients.
This had been standard practice for legal firms since September 1994, after HMRC agreed with the Law Society that local authority postal search fees could be treated as disbursements for VAT purposes. However, the judge agreed with HMRC’s view that the electronic search fees had been incurred by Brabners ‘in the course of making its own supply of services to’ its clients and therefore dismissed Brabners appeal as it was satisfied that they had obtained the search records as an integral part of the legal services that it provided, and that the conditions in Notice 700 Para 25.1.1 (which relate to disbursements) were not satisfied.
The judge stated that ‘In my view, wherever searches are obtained, the payment is part of the overall consideration which the client pays for the service supplied by the solicitor’. This means that VAT should have been charged on the recharged search fees leaving Brabners with a large VAT liability.
The treatment between the historical postal searches concession and the types of electronic searches mentioned in the Brabners case are clearly inconsistent. The fact that HMRC took the case to tribunal is probably an indication of how they see the VAT treatment of searches going forward. In the light of the Brabners decision HMRC’s view, as set out in full in its internal manual VAT Taxable Person Manual (VTAXPER47000), remains that whether or not a fee is to be treated as a disbursement will depend on how the information obtained in the search is used. If it is passed on to the client without comment or analysis, the fee may be treated as a disbursement. However, if the firm uses the information itself, for example in providing advice or a report, the fee for the search will form part of the charges for its services and will be subject to VAT.
HMRC has indicated that it is willing to work with the Law Society to improve its knowledge of current working practices within the conveyancing sector in order to provide clearer guidance to the profession on the VAT treatment of items of expenditure in the future. It is clear that firms will have to review their systems to ensure that they can distinguish between fees that are subject to VAT and those that continue to be considered as disbursements.
For more information, contact David Owens on 01604 645600 or email