VAT on Search Fees
Court decision could have major impact on conveyancing disbursements
A recent appeal in the First-tier Tribunal between a leading North-West law firm and HMRC could have a major impact on how law firms treat disbursements in the course of conveyancing. The case concerned whether search fees could be treated as disbursements outside the scope of VAT when the solicitor obtained those searches electronically. It found that the established concessionary treatment of postal searches as disbursements did not extend to electronic searches.
The First-tier Tribunal ruled that the searches attracted VAT because the law firm did not merely pass the searches onto the client but used the results in the course of its advice to clients; the law firm were not simply acting as a middle man to collect the search fee from the client. The conditions for treatment as a disbursement set out in HMRC’s guidance were not met.
The case did not contain any detailed examination of whether the law firm was acting as agent for the client – but arguably the fact that in turn the law firm obtained the searches from an intermediary with whom it had a contractual arrangement may have had a bearing on the Tribunal’s thinking.
Postal versus electronic searches
Since 1991, HMRC has, by concession, allowed solicitors to treat postal search fees as disbursements on the basis that “the fee is charged for the supply of access to the official record and it is the solicitor rather than the client who receives that service”. The Law Society which made representations to the Tribunal, argued that electronic searches should be treated in the same way, but the Tribunal rejected this on the grounds that the appeal did not concern whether the postal concession was right or wrong. It is arguable these postal searches also fall outside HMRC’s guidance for disbursements as they are used in the same way as electronic searches.
This precise issue has not been addressed by the Tax Tribunal until now. Earlier cases involved the charges for medical reports or where the lawyer marked up the cost of the searches.
The Law Society Response
The Law Society is considering the implications of the decision for its practice note on VAT and disbursements. Until this has been issued by the Law Society, law firms should consider their treatment of charges for electronic search reports and whether to follow the decision and add VAT to the cost of the report. If this VAT is queried, they can provide the customer with the tribunal case until the guidance by the Law Society is amended. It remains to be seen whether HMRC will take retrospective action more generally in such cases or whether it will withdraw concessionary treatment for postal searches.
If you would like to discuss VAT on search fees in more detail, please get in touch with our tax team.