VAT on disbursements ramifications of the Brabners LLP (Brabners) case

In our previous VAT briefing we suggested adopting a ‘wait and see’ approach pending the issue of guidance from HMRC on their view of how the decision affects law firms generally. However, as it is becoming increasingly unlikely that HMRC will issue any such guidance and as to our knowledge, Brabners has not submitted an appeal to the tribunal, we believe the position should now be reappraised. As a general point in our view the chances of a successful challenge against Brabners LLP decision are low and whilst it is evident that there may have been a misinterpretation of the issued guidance, it is likely that any challenge to there being a lack of clarity in HMRC’s guidance would be a high hurdle to clear.

The Tribunal decision in Brabners LLP is technically only binding on its facts, however, the decision now creates an anomaly between the VAT treatment of electronic searches and concession being applied by HMRC to postal searches. In light of this, in our view, the following approach should be taken by law firms in relation to disbursements that:

In relation to the prospective position:

  • firms should follow HM Revenue & Customs' issued guidance and apply VAT to electronic search fees where the nature of such search fees is the same, or materially the same, as the fees in Brabners LLP;
  • we recommend that firms should also review whether all other third party costs are being treated correctly for VAT purposes (whether or not disbursement treatment is currently being applied) and if not, adjust as required; and
  • in terms of ‘housekeeping’, it is our recommendation that consideration is given to the necessary changes which may be required to: accounting systems, engagement terms, VAT return procedures, invoicing procedures, and staff training in order that the firm may be fully compliant with HMRC’s issued guidance.

In relation to the historical position:

  • given that failure to disclose VAT liabilities may result in penalties and interest, where there has been an incorrect treatment of search fees, or any other expenses incorrectly treated as disbursements it is our recommendation that any required adjustments should be made to the retrospective position and disclosed to HMRC.

Background to the Brabners decision

In summary, the VAT case of Brabners LLP v HMRC - [2017] UKFTT 666 (TC) considered whether fees for electronic searches  incurred by a firm of solicitors could be treated as VAT free disbursements when recharged to clients, or whether the fees had to be recharged with VAT. In particular, the agency conducting the electronic searches had not added VAT to the invoices issued to Brabners who in turn, recharged the search fees to its clients as a disbursement, outside the scope of VAT.

While by concession, HMRC allow disbursement treatment where the fees for postal searches are recharged by solicitors to their clients, HMRC’s view was that the recharges of the fees for electronic searches do not qualify for disbursement treatment. The First Tier Tribunal agreed with HMRC concluding that the recharges for the electronic searches could not be treated as a VAT free disbursement on the basis that the searches were required by Brabners to perform the conveyancing services  provided to clients ie the firm was the consumer of the searches, not the client. 

Should you wish to discuss any of the above in further detail please contact Ian Carpenter or your usual RSM contact.

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