These practical examples cover the VAT treatment of certain common property transactions.
We emphasise once again that this is not a straightforward area of VAT law. It can require very finely balanced judgements. The conditions set out in HMRC guidance (section 25 of VAT Notice 700) may help you in determining the VAT position but as the Barratt and Brabners cases illustrate, the guidance may not provide a definitive answer and you should exercise your own judgement.
Many queries arise about the expenses incurred when acting for clients on property transactions.
In property transactions, property is sold on a caveat emptor basis. The onus is on the buyer to find out as much as possible about the property.
Normally a buyer would instruct you to undertake the necessary searches on their behalf, but increasingly, a seller may instruct you to obtain searches on their behalf to include in a sales pack or on an extranet to be provided to a buyer, to speed up the transaction process, or searches may be carried out for use in a finance transaction.
Ordering searches using online search providers
Searches may still be done by post or in person but in most situations they are done online. References in this section to a copy of the search results include an electronic as well as a paper copy.
Many solicitors obtain searches online through the National Land & Property Information Service (NLIS) or other online search providers. NLIS (via the licensed NLIS channel providers) and other providers facilitate electronic access to the official sources of land and property information in England and Wales.
When you order searches online through an online search provider, for example a water and drainage search, an administration fee will be charged in addition to the utility provider's search fee. If you use an NLIS channel provider you may also be charged the NLIS Hub fee.
You will be charged VAT on the NLIS Hub fee and any administration fee. No VAT is currently charged on LLC1 search fees or Land Registry fees but VAT will be charged on most other search fees. Some channel providers itemise each item separately, while others group them by category. You should therefore account for input tax in the normal way on any VAT you pay (see How to treat qualifying disbursements).
If you charge your client the cost of the hub fee and/or administration fees then these should be treated as items of expenditure and not as disbursements. The net amount of the fee must be included in your invoice as part of your professional charges on which VAT is charged at the standard rate. The amount your client pays in total will be the same as that charged to you.
Where you have been charged VAT by the channel provider in relation to any search, such as a mining search, then (assuming non-disbursement treatment) this should be treated as your input for VAT purposes. The search fee (i.e. the net amount) should be treated as part of your professional charges, although these fees will be itemised separately on the invoice and should bear VAT at the standard rate. In these circumstances the amount the client pays for the search will be the same as that charged to you.
The searches that are carried out by you on behalf of your client may include the following (available through NLIS and other online sources):
- Local Land Charges (LLC1)
- enquiries of the local authority (CON29, CON29O)
- Land Registry (a whole range of searches and copy documents are available for registered land) and land charges (searches for unregistered land)
- water utilities (drainage and water CON29DW and commercial drainage and water searches)
- Mining Search (CON 29M)
- Environment Agency (flooding and environmental)
- Forestry Commission
- Highways Agency (road building and maintenance)
- electricity (national grid)
- gas (pipelines)
- telecommunications (cabling)
- London transport (London Underground and Docklands Light Railway), Crossrail and High Speed Rail 2
- Civil Aviation Authority (airports)
- Canal and River Trust (canals)
- Ordnance Survey (maps and plans)
- probate and administration searches
- specialty searches, including Cheshire Salt Search, radon, clay, tin mining, limestone, gypsum, chancel repairs
- company/individual insolvency searches and K16 bankruptcy only searches
The search results would show whether there is anything which adversely affects the property and may impact on a client, buyer or bank's decision about whether to proceed with a transaction.
You may need to consider the search result and advise your client of the result in layman’s terms (for example in a report on title), or perhaps certify title to your client's bank.
Based on the Brabners and BA v Prosser decisions, HMRC may argue that the fact that you have made use of the search results or copy documents obtained to provide advice or give certifications means that the supply of the search result is a supply to you and therefore that the cost must be treated as a charge for part of your legal services and subject to VAT at the standard rate, rather than treated as a disbursement, whether or not VAT has been charged by your supplier.
VAT position for most common property searches
Whether the expenditure on search fees can be treated as a disbursement for VAT purposes only has a financial impact on your client where the supplier of the search result has not charged VAT. The fact that such expenditure can be treated as a disbursement means that the cost to the client will not be increased by the standard rate of VAT.
For there to be any possibility that such search fees may be treated as a disbursement, you should ensure that the conditions set out under Criteria for qualification as disbursement are met. Therefore, you should:
- give or offer to provide the original search report to your client. If you must give this to the mortgage company, you should give a copy to your client and explain to them that the original search report has been provided to their mortgage company
- tell the supplier the identity of your client (although it should be noted that in Brabners the tribunal expressed the view that identification of the client was less to satisfy the conditions for disbursement treatment but more for convenience and/or client accounting). You can do this by including in the standard search forms sent to the supplier some identifying feature such as a client and/or file reference number
It is considered good practice to retain the original search results/report with the title deeds or with other information stored (whether in hard copy form or electronically) on behalf of the client and therefore you should in all cases give your client a copy of the search results. Failure to provide your client with at least a copy of the search results will very likely mean that the fees cannot be treated as a disbursement.
However, firms should be mindful of HMRC’s position (set out in VTAXPER 47000) and of the Brabners and BA v Prosser cases in deciding whether to apply disbursement treatment on searches undertaken during the conveyancing process.
HMRC is of the view that where a solicitor has used the search to provide further advice to the client, it is considered integral to the solicitor’s legal supply and therefore cannot be treated as a disbursement. This means that you will have to charge VAT when you charge this cost to the client. This increases the cost to the client where the search fees are not subject to VAT.
Where the subject matter of the legal services related to the client’s business (such as the purchase of business premises) and the client is VAT registered, the client may be able to recover the VAT that you charge them, but in other cases the client must bear the additional cost.
Land Registry fees
Land Registry fees can be broadly divided into three categories:
- fees for registration applications
- fees for carrying out searches
- fees for obtaining copy documents
The Land Registry does not charge VAT on its fees.
It is our view that it should ordinarily be possible for registration fees to be treated as a disbursement.
Where searches are carried out or copy documents obtained, based on the Brabners and BA v Prosser decisions HMRC may argue that the fact that you have made use of the search results or copy documents to provide advice or give certifications means that the supply of the search results is a supply to you and therefore that the cost must be treated as part of your overall legal services and be subject to VAT at the standard rate, rather than treated as a disbursement.
Following agreement with HM Customs and Excise (HMCE – the predecessor to HMRC) in September 1994, when a seller’s solicitor obtains an office copy entry (now known as an official copy) and recharges the exact fee to their client they may treat it as a disbursement and outside the scope of VAT. We believe that this exception will only still apply in limited circumstances, especially as it is now common practice for official copies to be obtained on behalf of any party to the transaction.
In relation to the historic agreement, where the seller’s solicitor also uses the official copies as part of their advice (for example, to obtain the title number to insert in the transfer or to ascertain what restrictions are on title), then, based on the Brabners and BA v Prosser decisions HMRC may argue that the fact that you have made use of the official copies to provide advice means that the supply of the information is a supply to you and therefore that the cost must be treated as part of your overall legal services subject to VAT at the standard rate, rather than treated as a disbursement.
Local Land Charge Search Fees (LLC1)
Prior to 2017, the CON29, CON29O and LLC1 were ordered together from the local authority and known as the ‘local search’. No VAT was charged on any of those searches.
Since March 2017, local authorities were required to charge VAT on the CON29 and CON29O elements of the search, but not the LLC1 which remains outside the scope of VAT. In addition, from 2018, provision of the LLC1 is being moved to the Land Registry.
HMRC’s view is that fees for ‘local authority’ searches that you have used as part of your advice in a transaction are subject to VAT when you charge them to your client. But, historically by concession, HMRC has been prepared to allow solicitors to treat postal search fees as disbursements so that VAT will not be payable on the amount of the fee which should thus be shown separately on your invoice.
It is now very uncommon to obtain a LLC1 by post, and, in any event, following the Brabners and BA v Prosser decisions HMRC may argue that the fact that you have made use of the search results to advise your client or give certifications means that the supply of the search results is a supply to you and therefore that the cost must be treated as part of your overall legal services subject to VAT at the standard rate, rather than treated as a disbursement.
Enquiries of local authorities (CON29 and CON29O)
As mentioned above, from March 2017 local authorities were required to start charging VAT on CON29 and CON29O searches, so these no longer need to be considered in detail.
Since these changes have come into effect, you should be charging your clients VAT (output tax) and recovering the VAT paid on the CON29 and CON290 search fees (input tax).
Where a local authority search is carried out personally either by your firm or, as is more common, by a personal search agency, VAT must be charged on the fees. This is because the fee charged by the local authority for a personal search is for the supply of access to the official record and this is a supply that is made to you or the personal search agency, rather than your client.
Personal search agencies will charge you VAT on their fees and expenses for carrying out a personal search. The VAT element of the fee should be treated as an input for VAT purposes. The search fee (i.e. the net amount) should be treated as an item of expenditure (not as a disbursement) and added to your invoice on which VAT is charged. The amount your client pays in total will be the same as that charged to you.
If you undertake a personal search without using an agency, the local authority’s fee will be treated as part of your professional charges (although itemised separately on the invoice) and you should charge VAT on these fees at the standard rate.
Where these searches are requested directly from a highways authority, VAT may or may not be charged by the relevant highways authority.
If VAT is not charged, then based on the Brabners and BA v Prosser decisions HMRC may argue that the fact that you have made use of the search results or copy documents obtained to advise your client or give certifications means that the supply of the search results is a supply to you and therefore that the cost must be treated as part of your overall legal services subject to VAT at the standard rate, rather than treated as a disbursement.
Bank transfer fees
HMRC’s views on the VAT treatment of telegraphic transfer fees (as bank transfer fees used to be called) were set out in a letter from the VAT Administration Directorate published in the Gazette on 18 November 1992. This letter confirmed that telegraphic transfer fees are not disbursements for VAT purposes and must be subject to VAT when passed on to the client.
However, the letter also acknowledged that there had previously been uncertainties, and where HMRC staff had provided incorrect advice no action would be taken to recover VAT on past transactions.
In the tribunal case of Shuttleworth & Co v Commissioners of Customs and Excise (LON/94/986A) it was held that the transfer of funds by a solicitor was part of the overall conveyancing service provided by a solicitor to their client. Therefore, a CHAPS fee paid by a solicitor to the bank could not, for VAT purposes, be treated as a disbursement in the solicitor’s invoice to their client.