Brabners Law firm are facing a £68,000 VAT Bill following an HMRC tribunal ruling that electronic property search fees are not disbursements. This case acts as a cautionary reminder to the rules on disbursements
Background to the Brabners Case
They had used the services of a known provider “Searchflow” to obtain the electronic property searches, free of VAT.
Brabners had relied upon the VAT rules on disbursements and had passed these costs on to their clients with no additional VAT applied.
HMRC assessed Brabners on £68,000 on the basis that the searches were incidental to the primary supply of services which were taxable. Therefore, the search fees were deemed to be a standard rated supply.
Law firms are quite understandably concerned about the decision in this case and there are mixed reactions as to what position should be taken going forwards:
1. The reason why Brabner appears to have lost the case against HMRC is because the Law firm did not appear to have always passed on the results of the searches directly to their client. HMRC found that in some cases they were using the searches for their own research purposes and in order to fall within the definition of a disbursement they had to prove that they had passed the results of the search on to the client “without analysis or comment” which they appear to have failed.
The “without analysis or comment” is the salient issue here as we can only relay at this stage how this was applied to the Brabner case. In this particular case the Law firm was found not to have passed on the searches to the client and were seen to use them for their own research. It is imperative that the results of the data is passed on.
Points for Law firms to consider based upon the facts of this case:
How do you deliver your report to your client? Let’s take a look at a direct quote from the case:
“When the Appellant obtains search results, and prepares a separate report, the Appellant is using that information as part and parcel of its overall service. When that has happened, then the search fees should not have been treated as disbursements, and VAT should have been charged. The payment is part of the overall consideration which the client pays for the service supplied by the solicitor”.
When you have obtained the results of a search do you merely present the facts to the client and not add any further comment. Have you incorporated the results of the search into a project or have you been engaged to complete a report using the information you have obtained and therefore this is your research which you are encompassing within your report material. Are you adding value to the facts, manipulating the information to provide your own interpretation or opinion and not sticking to the facts. Remember a specialist opinion is adding value.
2. If the legal firm is obtaining searches purely as a necessity of the engagement terms to pass data on to their client, which their client would have to obtain themselves, then they should still fall within the definition of a disbursement and VAT is not applied. For example, if it is a search for conveyancing purposes and is made with the Land registry to prove its existence and is passed directly onto the client, then it is a disbursement and Vat does not apply. Land registry fees do not appear to have been debated.
3. Brabner also appears to have failed because there was “evidential inadequacy.” Law firms must review their internal files in order to satisfy themselves that their engagement and supporting documents show a clear paper trail of the searches they have made on behalf of the client and how those results and charges have been passed on.
Law firms may wish for us to undertake a review if they are concerned about meeting the disbursement criteria: Here is a reminder.
The eight conditions to be met are summarised below and it is vital that Law Firms review their disbursements and are satisfied that they meet all of the conditions.
1. They paid the supplier on behalf of the client
2. The customer received the searches and had the benefits of the searches that you paid for
3. It was the clients’ responsibility to pay for the searches per the terms of engagement and not yours
4. They had permission from the client to make the payment
5. Their client knew the searches were from a third party
6. The costs are shown separately on the invoice
7. They pass on the exact amount of the search to their client
8. The searches our client paid for are in addition to the cost of their legal services
Therefore, it is important for Law firms to review the range of services they provide and more importantly the end delivery to their client. You may wish for us to carry out a review for you.
It is important to consider whether Law firms have been charged VAT on particular searches and whether the treatment going forwards should actually be reclassified as a recharge rather than disbursement if the conditions cannot be met. If the costs are to be treated as a recharge to the end client then the Law firm can recover the VAT incurred and recharge this on as output VAT. Should you need further advice on this matter please contact one of our Tax Team to discuss the matter further.
With regards as to whether HMRC will now target all Law firms, they will not have sufficient resource but no doubt this will be an area which will be looked at in particular detail when they have their next VAT visit.
If you would like any advice on the above then please don't hesitate to contact me.
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