office twilight

Law Society replaces guidance on VAT and disbursements

office twilight

Over the last two years there has been increasing uncertainty as to the correct VAT treatment of disbursement charges made by law firms and it has become evident that there are a range of VAT treatments being adopted across the sector. During this period, the Law Society had issued several interim notes but has recently provided a more comprehensive update to assist law firms in making decisions about what costs may be treated as disbursements for VAT purposes

The guidance VAT treatment of disbursements and expenses replaces the former practice note on VAT and disbursements.

What is the issue?

As part of their handling of a particular client matter, it is quite common for law firms to pay certain fees on behalf of their clients and/or to arrange for third party specialist input; for example medical reports for personal injury claims or property searches in conveyancing work. Recent VAT case-law is calling into question the situations where the ‘VAT free’ disbursement rules can be applied when the law firm passes on these costs to its client.

In late 2017, the First Tier VAT Tribunal provided a decision in the Brabners v Revenue and Customs (TC06093) case in relation to online search fees that led to a number of law firms receiving challenges from HMRC and earlier this year the Court of Appeal provided a judgment in British Airways (British Airways Plc v Prosser [2019] EWCA Civ 547) which cast further doubt as to the correct VAT treatment of disbursements in the legal sector.

To date, HMRC are yet to provide any public comment and it is has been reported in previous Law Society updates that HMRC considers the position set out in its own guidance to be adequate.

The Law Society guidance

The Law Society is clear that its updated guidance does not seek to set standards, its content has not been endorsed by HMRC and that the purpose of the note is solely to provide an update to the profession, based on the information available to date.

The guidance recognises that the direction of travel in both the Brabners and British Airways cases has been that law firms are using the bought in costs (online property searches and medical reports in the cases) as part of their legal service, so VAT falls to be due on the recharges when the legal service itself is subject to VAT.

The guidance includes details of the recent court decisions and some practical examples of typical disbursement charges such as online property searches, land registry fees, statutory fees, local authority fees, highways searches and bank transfer fees.

Next steps

A VAT disbursement is a service or cost incurred by an organisation on behalf of its client, whereby the organisation is only the agent and vehicle for payment. Where these conditions are met, the charge does not form part of the consideration for services and will be outside the scope of VAT. If firms use the disbursement cost as part of its own supply, then the cost will not qualify as a VAT disbursement and instead represents part of the overall value of the services provided to the client and will follow the VAT treatment of the services provided.

Law firms will need to consider the VAT treatment of all their disbursement charges. If you would like to discuss this topic in more detail or would like help in reviewing your firm's position contact Robert Marchant or your usual Crowe contact.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services