HMRC announce disbursement VAT change

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The VAT treatment of disbursements charged by solicitors and conveyancers to their clients can be a complex issue.  This was highlighted by the First-Tier Tribunal in the 2017 case of HMRC v Brabners LLP

The case concerned electronic search fees paid by Brabners and recharged to its clients as VAT free disbursements.  The Tribunal agreed with HMRC’s view that the electronic searches were ‘consumed’ by Brabners in the course of providing its services and, therefore, could not be treated as a VAT free disbursement.  Instead, the recharge should be treated as further payment for legal services and, therefore, subject to VAT.  See our earlier article for further details.

What is the correct VAT treatment of disbursement?

The Brabners decision has caused much concern and uncertainty about the correct VAT treatment of disbursements.  Whilst the Law Society has since published extensive guidance on this topic, HMRC have yet to comment publicly.  However, it would seem that this is about to change.

HMRC have published Brief 06/20 (5 June 2020) which announces the withdrawal of a long-standing concession allowing solicitors to recharge postal search fees (but not electronic search fees) to their clients as a VAT free disbursement.  The concession, which was introduced in 1991, is to be withdrawn from 1 December 2020.  HMRC say that this is necessary, as there is no basis in law for the concession and they believe it has caused confusion concerning the correct VAT treatment of disbursements.  

Do you need to review your processes?

HMRC believe that changes in industry practice mean that postal searches are rarely used.  The impact of this announcement may, therefore, be quite limited.  Nevertheless, solicitors and conveyancers should review their processes to ensure that VAT is accounted for on the recharge of postal search fees from 1 December 2020.

Revised guidance will be announced

Perhaps the most interesting part of Brief 06/20 is that HMRC say they will publish revised guidance on the VAT treatment of disbursements ‘…to ensure consistency and provide clarity’, albeit the Brief suggests that this will not be until sometime after 1 December 2020.  Whilst new HMRC guidance providing much needed clarity is to be welcomed, it is long overdue.

We will, of course, provide updates as further details become available.  In the meantime, if you would like to discuss this or any other VAT matters, please contact Sarah Barron in our VAT team below.

Posted in Blog, Legal