In the case of Brabners LLP (supported by the Law Society) the First-Tier Tribunal has ruled that Brabners LLP is liable to pay VAT on search fees that had been charged to clients as VAT free disbursements. The case related to whether search fees for an electronic review of local authority and local land charges could be considered a VAT free disbursement or whether VAT should have been charged to clients.
The tribunal agreed with HMRC that such searches were part of the conveyancing service to clients. As a result they could not be treated as a VAT free disbursement and were therefore part of the overall consideration for that service.
Until 2017 the agency conducting the electronic searches had invoiced Brabners LLP for the cost of the search without the addition of VAT. Brabners LLP had passed on that charge to clients as a disbursement without VAT being incurred in the name and on behalf of the client.
Whilst following agreement with the Law Society that, by concession, postal searches can be treated as a disbursement, this concession did not apply to electronic searches. The tribunal did not accept the Law Society’s argument that no distinction could made between postal and electronic searches.
Analysis and next steps
The VAT liability of local authority search fees has, from 1 April 2017, changed as HMRC now require local authorities to charge VAT on such searches. Therefore, this decision will impact charges treated as VAT free disbursements for the periods prior to 31 March 2017, with up to a maximum of 4 years in arrears.
It is expected that following this decision HMRC will seek to assess law firms for unpaid VAT. Therefore, to seek to mitigate penalties to the maximum extent possible, it is recommended that law firms impacted make a disclosure to HMRC as soon as possible and prior to any enquiry by HMRC.
It is likely that this decision will be appealed so there may be an opportunity for law firms to stand a claim behind any lead case.
As a final note this decision can be contrasted with the earlier Tribunal decision in the case of Barratt, Goff and Tomlinson which related to fees paid for medical records and reports in connection with personal injury claims. In Brabners LLP case, a distinction from Barratt, Goff and Tomlinson was made by the Tribunal as medical records were confidential while property records are public. Whether HMRC will see such a distinction or whether they will seek to apply VAT on other disbursements is yet to be seen.
Please contact Ian Carpenter for further information.