The Law Society has issued interim guidance to its members on property search fees and when these should be disbursements. This follows the decision in Brabners, which suggested the fees could never qualify as disbursements.
In Brabners LLP v HMRC [2017] TC06093, the First-Tier Tribunal (FTT) found that the amount paid by a client in respect of electronic property search fees should be considered part of the overall consideration paid for legal services.
This meant that the firm providing the services was not acting as an Agent for the client and the fees it passed on to the client in respect of the searches were not Disbursements and VAT was chargeable.
Most interestingly, the FTT formed the view that the supply could not be a disbursement even if all the firm did was pass the report straight on to the client, without additional comment or analysis. In other words, the FTT concluded that it would always be part of the solicitor’s services.
The Law Society has set out its own view of the position in interim guidance provided for members:
- Where the firm is acting as agent for the client and the conditions for treating the search fees as a disbursement are met, it should be treated as such for VAT.
- The act of obtaining the report is different to the act of advising on the report, and the report properly belongs to, and is obtained on behalf of the client.
- This argument was accepted by the FTT in a case involving Medical reports.
- It was not accepted in Brabners.
- HMRC manuals also suggest that it depends on how the information is used. If passed without comment to the client, then it may be treated as a disbursement. If it is used by the firm in providing a report or advice, it is part of the service.
HMRC have indicated in talks with the Law Society, they will continue to accept the treatment of search fees are disbursements, as long as it is passed directly to the client with no comment or advice.
The position is further complicated by the fact HMRC have historically given concessionary treatment to postal search fees, and agreed these can be treated as a disbursement. HMRC have stated they will review this concession and will not be extending it to electronic searches.
This currently leads to a difference in treatment between postal and electronic searches which the Law Society believe is unsatisfactory.
HMRC and the Law Society will be working together to provide clearer guidance going forward.
Links
Shift in VAT treatment on search fees
External link: Law Society guidance
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