Solicitors are being warned they could face hefty VAT bills for electronic property searches after a landmark ruling deemed they should not be treated as a disbursement.
The caution comes following the case of Brabners LLP Vs HM Revenues & Customs (HMRC) which cast doubts over solicitors’ treatment of disbursements.
Brabners conducted searches and used the results as part of its advice to clients. The law firm treated the cost as a disbursement and invoiced the client for this cost, excluding VAT. HMRC assessed the law firm as liable for VAT, a decision that the law firm appealed.
It is standard practice in the sector to treat such costs as disbursements where no VAT has been incurred, this has now changed for electronic search fees.
Guidance from the relevant regulatory bodies, which sets out how legal disbursements should be treated for VAT purposes, is now under review following the tribunal decision.
HMRC which applies strict criteria to such situations, argued that Brabners’ costs were not VAT disbursements as the recharge of the cost formed part of the onward supply to the client and was therefore subject to VAT.
The First Tier Tribunal was in agreement with the HMRC, meaning Brabners was ordered to pay a £68,000 VAT bill as the results were used as part of their advice to clients, and they were not acting as a middle man to collect the search fee from the client.
At Pierce, we would advise law firms to review their disbursement treatment in light of the outcome of this tribunal, for both previous and future policies.
If your firm is using the same process as Brabners, then contact the Law Society to seek clarification before amending your practices as Brabners may consider taking this appeal further.
For more information regarding VAT for solicitors, please contact Gary Speak on 01254 688 100 or email firstname.lastname@example.org