Brabners update: Law Society comments on VAT and disbursements

Following last year’s First Tier Tribunal decision in the Brabners case (TC06093) there remains uncertainty as to how the VAT disbursement rules should be applied to online search fees and we are aware of inconsistency in treatments across the legal sector. In brief, the issue is whether firms should be charging VAT on the recharge of online search fees, or whether VAT free disbursement treatment is available.

Latest development – Law Society interim guidance

At the end of May the Law Society issued 'interim guidance on the VAT treatment of electronic searches'. The Law Society's working party met with HMRC to discuss the Brabners decision and to seek clarity on how HMRC intends to approach the VAT treatment of online searches. The Law Society's update can be accessed here.

The key points arising appear to be:

• the Law Society’s view continues to differ from HMRC’s as to how the European VAT law about disbursements should be applied but the Law Society suggest that firms may wish to follow HMRC’s guidance (note “may”, not “should” or “must”)
• HMRC does not intend to change the approach detailed in their guidance that VAT free treatment is available where the law firm passes on the search to the client without comment or analysis. Where the firm uses the search itself, for example in providing advice or a report, HMRC’s view is that the fee forms part of the charge for services and is subject to VAT
• historically, there has been a concession given for postal searches for these to be VAT free in all situations, and HMRC has said it will be reviewing this. Although note that it remains available at the moment
• HMRC will work with the Law Society to gain a better understanding of working practices in the conveyancing sector with the aim of providing clearer VAT guidance to the profession.

Actions to take

In our alert issued in April 2018 we provided details of the actions that we recommend firms take in assessing the implications for their business. The alert can be accessed here. These recommendations remain unchanged.

The key point is that 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 need to consider their own factual position and how they consider the UK and EU VAT law applies to them.

As part of these considerations there is also the issue of the position for the last four years (the statutory period for assessment by HMRC) an aspect which was not covered in the Law Society update. However, a strategy which implicitly accepts that disbursements are now subject to VAT given there has been no change in legislation, could bring into question why VAT wasn’t accounted for in the past. There is the potential for penalties for underpaid tax of 0-30% for careless errors and 30-70% for deliberate errors. Investigating the tax amounts in issue and taking professional advice and/or documenting the reasons for the position taken by the firm is strongly recommended as this should act as evidence of ‘reasonable care’ and, together with the other behaviours of the taxpayer, help with either mitigating or negating in full any financial penalty.

To discuss this topic in more detail or for help in reviewing your firm's position contact Robert Marchant or your usual Crowe contact.