A recent First Tier VAT Tribunal found against law firm, Brabners, resulting in a VAT assessment of £68,000 being upheld. This case could be of significant interest to all law firms providing conveyancing services and recharging fees incurred for property searches. It may also have application to others who recharge costs as disbursements.
The case revolves around the treatment of electronic property searches particularly those procured from well-known provider, Searchflow.
Searchflow had until recently provided these services to Brabners free of any VAT, in line with the treatment applied by local authorities. Brabners then passed these costs on to their clients as a disbursement with no additional VAT applied.
HMRC assessed Brabners on the basis that the searches were actually an incidental part of their overall service to their clients and not a disbursement under the rules. Since the main supply was taxable, the recharge of the search fees which are incidental to the overall service should follow the same treatment as the main supply and also be taxable.
The way the firm had been treating the supplies was in accordance with guidance provided in The Law Society’s Practice Note on the subject but based on the Tribunal’s ruling this advice is now questionable. It is unclear as to whether this case will be appealed to the Upper Tier Tribunal, and we understand that The Law Society is currently reviewing the matter before making further comment.
Although search fees now carry VAT, we would recommend that law firms now 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.
This article is written for general interest only and is not a substitute for consulting the relevant legislation or taking professional advice. The authors and the firm cannot accept any responsibility for loss arising from any person acting or refraining from acting on the basis of the material included herein.