Members will be aware of the First-tier Tribunal decision in Brabners LLP v HMRC Commissioners. The Tribunal found that the amount paid by the client in respect of electronic property search fees formed part of the overall consideration they paid for the service provided by the firm. As a result, the Tribunal held that the fees for those searches could not be treated as disbursements for VAT purposes.
Please note that the position on local authority searches has changed since HMRC required local authorities to charge VAT on CON 29 and CON29O searches: since 1 January 2017 if they were able to do so at that date, and from no later than 31 March 2017.
The Law Society's position
The decision in Brabners has created a considerable amount of uncertainty in respect of the VAT treatment of property-related searches and fees, particularly where no VAT is charged by the search provider.
As the decision demonstrates, this is a complex area of VAT law which has been interpreted and administered in different ways:
- The Law Society's position in Brabners was that when a solicitor obtains a report, he or she should be regarded as acting as agent for his or her client pursuant to Article 79(c) of the Principal VAT Directive, where the relevant conditions are met, and the fee for obtaining the search should therefore be considered a disbursement for VAT purposes. The Law Society's view was that the act of advising on the report is different, both in time and conceptually, from the act of obtaining the report; and that the report is obtained on behalf of, and belongs to, the client. This argument was accepted by the First-tier Tribunal in the case of Barratt, Goff and Tomlinson in the context of medical reports, but not accepted by the First-tier Tribunal in Brabners on the facts of that case.
- HMRC's view, as set out in full in its internal manual 'VAT Taxable Person Manual' (VTAXPER47000), is that whether or not a fee is to be treated as a disbursement will depend on how the information obtained in the search is used. If it is passed on to the client without comment or analysis, the fee may be treated as a disbursement. However, if the firm uses the information itself, for example in providing advice or a report, the fee for the search will form part of the charges for its services and will be subject to VAT.
- In Brabners the First-tier Tribunal held that whenever a solicitor obtains a search report on behalf of his or her client, the payment for the search 'is part of the overall consideration which the client pays for the service supplied by the solicitor'. The Tribunal went further than HMRC's guidance and arrived at the same conclusion whether or not a solicitor produced a separate report (see paragraphs 53 to 54 of the judgment in Brabners). In other words, the Tribunal held that disbursement treatment was not available even where the solicitor passed the search result on without comment or analysis.
The lack of clarity is unsatisfactory for firms and search providers. The result of the judgment in Brabners is that there are now different approaches to VAT treatment depending on the method used to obtain the search. The Tribunal accepted that HMRC had historically made the concession that postal searches were to be treated as a disbursement, but rejected any argument on the resulting inconsistency, in the main because the correct treatment of postal searches was not the subject matter of the case. The Law Society remains of the view that no distinction should be drawn between postal searches and electronic searches. We would expect the tax position for what is essentially the same activity to be consistent.
Discussions with HMRC
The Law Society recently attended a meeting with HMRC to discuss the decision in Brabners and to seek clarity on how HMRC intends to approach the VAT treatment of electronic property searches going forward.
HMRC has confirmed that they do not intend to change the approach set out in their published guidance as to whether a property search fee should be treated as a disbursement for VAT purposes. If the search is passed on to the client without comment or analysis, HMRC says the fee may be treated as a disbursement. However, if the firm uses the search itself, for example in providing advice, or a report, HMRC’s view is that the fee will form part of the charges for its services and will be subject to VAT.
Although the Law Society’s interpretation of Article 79(c) differs from HMRC’s, in the absence of a binding decision of an Upper Court, firms may wish to follow HMRC’s guidance when deciding whether to charge VAT on fees for property related searches going forward.
HMRC has also indicated that it is willing to work with the Law Society to improve its knowledge of current working practices within the conveyancing sector in order to provide clearer guidance to the profession on the VAT treatment of items of expenditure in the future. We welcome this step.
Historically by concession, HMRC are prepared to allow solicitors to treat postal search fees as disbursements, so that VAT will not be payable on the amount of the fee. However, HMRC has acknowledged the need to review the position in respect of the postal search concession. Although it remains available currently, HMRC has ruled out any extension of it to electronic searches.
In the meantime, if HMRC approaches your firm in relation to the VAT treatment of historic searches, we would be interested to hear from you, particularly if your firm’s standard practice is to pass on the search (or a copy of the search) to the client. Please contact Disbursements@lawsociety.org.uk.
Firms who are contacted by HMRC in relation to historic payments, or have questions about their historic treatment of searches, may wish to seek independent advice.