Following the VAT Tribunal decision in HMRC v Brabners LLP, firms of solicitors that provide conveyancing services will need to consider the impact of this case on their own VAT position and VAT on property searches.
Electronic Property Searches
The case concerned the VAT treatment of recharges by Brabners to its clients for costs incurred when obtaining electronic searches. Brabners treated the recharges as disbursements for VAT purposes and did not charge VAT. HMRC disagreed with the VAT treatment and issued an assessment for underdeclared VAT for the maximum four year period, totalling £67,776. As many of the clients were private individuals and, therefore, unable to recover any VAT charged to them, this will result in additional VAT costs which will have to be borne by Brabners or its clients.
HMRC argued that the searches were ‘consumed’ by Brabners in the course of providing conveyancing services to its clients. Brabners was not simply a ‘conduit or post-box’ for search results. Consequently, payments for searches were part of the overall consideration for the conveyancing services and, therefore, subject to VAT.
The Tribunal found in favour of HMRC.
The Tribunal considered written submissions from the Law Society in reaching its decision. The Law Society argued that the concession introduced by HMRC in 1991, which allows the recharging of postal search fees to be treated as a disbursement, should extend to electronic searches and that it would be ‘inconsistent or anomalous’ to apply different VAT treatments. Whilst the Tribunal indicated that it had some sympathy with this line of argument, it was unable to take this into account when reaching its decision, as the application of concessions is outside its jurisdiction.
What Does it Mean?
On the face of it, it seems clear from the decision that HMRC expect law firms to account for VAT on recharges of electronic search fees. This would mean that a large number of law firms will now need to submit error correct notifications to HMRC for VAT underdeclared in the past four years. In addition to the unexpected VAT cost, HMRC could impose interest charges and penalties.
What are the implications?
It is, however, possible that the Tribunal’s decision is not the end of the story. The appeal was heard by the First-Tier Tribunal and, as such, the decision does not set a legal precedent. The argument put forward by the Law Society concerning the inconsistency of excluding electronic searches from the concession was outside the Tribunal’s jurisdiction, which means that a question still remains concerning ‘legitimate expectation’. There is also the question of how consistent HMRC have been when applying the concession in practice, given that, in many cases, the VAT treatment of disbursements will have been reviewed by HMRC during VAT inspections. It would be inequitable for HMRC to enforce the Brabner’s decision in some cases, if it has taken a more lenient view in others.
It is not known whether HMRC intend to make any formal comment concerning the impact of the Brabners decision and what action they may take to enforce it. The Law Society has said that it will be updating its guidance on the treatment of disbursements, in light of the decision. It is possible that it may also be liaising with HMRC at policy level, in order to resolve the uncertainty created by this case.
The timing of the Law Society guidance and any comment from HMRC is not yet known. In the meantime, law firms need to consider what action to take to protect their position. The first step will be to review the extent to which VAT may have been underdeclared in the past four years. Any past contact with HMRC on the subject of disbursements, such as VAT inspections, rulings or other correspondence, should also be reviewed so that this can be taken into account.
Once the potential impact of the Brabners decision has been established, law firms should consider what action is most appropriate to their circumstances. As mentioned above, there is a risk of penalties where VAT has been underdeclared. As the rate of any penalty would be based on the behaviour of the VAT registered business, making an unprompted approach to HMRC in order to resolve this issue should reduce the risk of penalties.
Given the current uncertainty, law firms should consider taking a cautious approach and charging standard rate VAT on such recharges in future, until HMRC’s position becomes clear. This would limit any potential exposure. VAT charged by search providers would be reclaimable by the law firm, subject to the normal rules.
As well as reviewing the past VAT treatment of electronic search fees, we would suggest that law firms also review the VAT treatment of other types of recharges which they treat as disbursements, to ensure that the VAT rules are being correctly applied.
Our VAT team will be happy to advise on the specific circumstances of your firm. If you require any further information on VAT on property searches or any of the issues raised above, please contact Sarah Barron below or your usual Menzies contact.