A recent First Tier VAT Tribunal, revolving around the treatment of electronic property searches, has found against law firm, Brabners, resulting in a VAT assessment of £68,000 being upheld. This case could be of significant interest to all firms providing conveyancing services and recharging fees incurred for property searches.
The decision concerned whether such search fees could be considered a disbursement and whether VAT should have been charged to clients. HM Revenue & Customs (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.
Judge McNall recognised that Brabners “had acted in good faith” and had complied with the Law Societies guidelines, however he concluded that when Brabners obtained search results, and prepared a separate report on them, it was using that information “as part and parcel of its overall service”.
Notwithstanding that Brabners were supported by the Law Society in presenting its case, the Tribunal agreed with HMRC’s position and the court declared that 20% VAT should be levied on the whole search cost, not just on part of the search cost.
It is not yet clear whether this case will be appealed to the Upper Tier Tribunal and The Law Society have said that they are “considering the implications of the decision for our practice note on VAT and disbursements.”
What does this mean for conveyancers?
Although First Tier Tribunal decisions commonly have no bearing in law and do not generally set legal precedent, it is thought possible that HMRC could look to target conveyancing firms for an under-declaration of VAT in relation to the recharge of search fees to their clients.
Firms may choose to delay changing their current practice as the decision could yet be overturned, but taking this course of action poses a risk if the decision is upheld. It has been suggested by many leading law firms that the safest position may be for such searches to be treated as a vatable recharge rather than a disbursement. This will only impact on transactions where VAT has not already been charged on the original cost.
What does this ruling mean for tmgroup?
In the short term, whilst we await further case law review, it will mean no change. We are proposing to continue to invoice the cost of the searches with VAT if we incur VAT in buying the searches and exempt from VAT if no VAT is charged by the supplier.
Pending further case law review, whereby the Brabners ruling is certain to be the new normal, we will review our positon on charging VAT on all searches.