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You may already be aware of the recent first-tier tribunal case involving Brabners LLP, in which the firm lost their appeal against an assessment from HMRC for Output VAT not collected on recharged local authority search fees. This firm, like most, had treated the search fees as disbursements and therefore simply passed the cost to their client on the basis that this was out of scope for VAT purposes. This is not the case as HMRC deem the cost to be incurred by the solicitor in the provision of legal services as they are duty bound to use those results when advising clients. It is not a report which is merely obtained and passed on and is therefore an expense incurred by the firm which should be recharged as an expense plus VAT. (The VAT application that follows can be likened to that of recharged travel expenses as opposed to a disbursement such as SDLT, for example.)
In fact these search fees have always been an expense, but used to be obtained by post and were therefore covered by a specific HMRC concession which allowed them to be treated as disbursements. For many years now those same searches have been requested and delivered electronically and so many solicitors had simply not differentiated between the two. Others may not have been directly aware of the concession but taught that the searches were disbursements as a result. The tribunal case specifically looks at this point and upheld HMRC’s view that the concession covers search fees obtained by post but not by electronic means, despite the Law Society’s involvement in support of the solicitor.
This matter is likely to evolve further and thankfully the judge made clear that the mistreatment of VAT in this case was not due to misconduct or dishonesty, which restricts HMRC’s remit to four years without penalties. However, as it stands this ruling has the potential to put all conveyancing firms on their radar if they choose to pursue other firms as they did with Brabners LLP.
Cottons acts for a number of Solicitors, varying in size and covering all areas of law, with a specialist team looking after their Solicitors Accounts Rules requirements. If you would like further information then please contact Sarah Randall at SRandall@cottonsaccountants.co.uk.