It has been about six months since the tribunal decision in Brabners v Revenue and Customs (TC06093) in relation to online search fees and it is apparent that there is a degree of confusion as to what this means for professional services firms when invoicing for disbursement expenditure. Some firms have consistently charged VAT on these costs but many have not. For those that have not been charging VAT, the lack of commentary from HMRC on the matter and inconsistency of treatment across the sector has resulted in many firms simply deciding that the best course of action is to charge VAT on all disbursed costs.

This approach should be considered with caution as the decision did not establish a new approach from HMRC, or a new interpretation of existing legislation. A strategy which implicitly or explicitly accepts that disbursements are now subject to VAT, when there has been no change in legislation, interpretation or terms and conditions could bring into question why VAT wasn’t accounted for on disbursements for the past 4 years (the statutory period for assessment by HMRC).

What does this mean for professional firms?

The Brabners decision was only heard in the First Tier Tribunal, and whilst demonstrating HMRC’s view, the judgment is not binding on any other taxpayer. Other firms are entitled to and should review their own position and draw conclusions based on their own facts, terms and conditions and where applicable with reference to the European VAT Directive, which has precedence over HMRC’s published guidance.

We recommend firms to take the following actions:

• understand whether the Brabners decision can be distinguished either on legal grounds or differences in fact. This exercise should also consider the different types of disbursed costs applicable to the firm. For example, the Brabners case concerned online land registry search fees and it was accepted that the position is different for both postal searches (where there is a long established HMRC concession) and fees for accessing medical records (as such records are confidential and belong to the individual).
• consider the potential liability in the past four years. Consider what is at stake if a firm starts to charge VAT and implicitly accepts a past liability. In calculating the quantum, at risk firms should also consider the potential penalties and interest that may be due in addition to the tax amount. VAT penalties commonly range from 0-30% if the error was careless and 30-70% if the error was deliberate.

Taking professional advice and/or documenting the reasons for the position taken should act as evidence of ‘reasonable care’ and this, together with the other behaviours of the taxpayer, should help with either mitigating or negating in full any financial penalty.

How we can help?

In early April the Law Society issued a further update to members noting that HMRC has started the process of visiting firms and issuing assessments.

This adds greater urgency to the need for firms to assess their position and make a decision about what action to take. Adopting a ‘watching brief’ is not a recommended strategy.

To discuss the Brabners decision and help to review your firm’s position contact Robert Marchant, Keri Pay or your usual Crowe contact.