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 called into question the situations where the ‘VAT free’ disbursement rules could be applied when the law firm passed on the 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 a couple of years later the Court of Appeal provided a judgment in British Airways (British Airways Plc v Prosser  EWCA Civ 547) which cast further doubt as to the correct VAT treatment of disbursements in the legal sector.
The British Airways decision has a broader impact on the treatment of disbursements, indicating that the contractual position may not reflect the economic reality. In short, in the view of the court, any disbursement incurred on anything other than a “post-box” basis will be incorporated within the supply of services by the solicitor who is acting as principal, and so be subject to VAT when supplied to a UK established client.
The British Airways decision increases the prospect of firms facing questions and assessments from HMRC where they continue to treat disbursements as VAT-free which could, to any degree, be seen to form part of the solicitor’s services. Law firms are therefore recommended to review the treatment of their disbursement charges, recognising that relying on differentiators from Brabners may no longer be sufficient.
The Law Society has issued a 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.
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 to the client 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 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.