HMRC: assessed firm as liable for VAT
A leading north-west law firm has been ordered to pay £68,000 in VAT for electronic local authority property searches it procured from an agency, after a tribunal ruled that they should not have been treated as disbursements.
The First-tier Tribunal ruled that the searches attracted VAT because Brabners then used the results as part of its advice to clients; the solicitors were not simply acting as a middle man to collect the search fee from the client.
The ruling could have significant repercussions for many conveyancing firms and the Law Society intervened on Brabners’ side given the case’s importance.
Over the period in question (May 2012 to June 2015), well-known provider Searchflow invoiced Brabners for the cost of the search without VAT “since, until early 2017, local authorities did not routinely charge VAT for searches, on the basis that it was charging simply for access to the documents – whether real or digital,” tribunal judge Dr Christopher McNall noted.
Brabners treated this cost as a disbursement and invoiced its client for the money, also without VAT. When HMRC assessed the firm as liable to the VAT, it appealed.
Citing a 2006 EU Directive, HM Revenue & Customs (HMRC) argued before the tribunal that search fees were not simply repayment of expenditure incurred on behalf of the customer, “but rather constitute consideration obtained, in return for the supply, from their client, and which forms part of the charges for their [the law firm’s] services.
“HMRC contends that the information within the search results is used by [Brabners] to give advice to their clients, and hence recovery of the outlay represents part of the overall value of the solicitor’s supply to their client.
It also referred to an internal HMRC manual that said VAT would not be chargeable by either the search company or the solicitor if they passed it on “without analysis or comment”.
While emphasising that Brabners had acted in good faith, Judge McNall agreed with HMRC that this was not what was happening here.
“The appellants are not simply a conduit or post-box for search results. Simple common sense dictates that clients engage the appellant in transactional work since the appellant knows what it is doing, knows what a search is, knows what searches to obtain, knows how to get them quickly and conveniently, and knows what to do with them when it gets them.
“In my view, this reasoning can be extended so that silence from the appellant as to the searches which it had done and their results would be taken by most clients as an ‘all-clear’.”
The judge rejected the Law Society’s argument that the act of obtaining the search results and using them to prepare a report were “conceptually different”. He said: “I cannot readily identify the ‘concept’ which is said to be ‘different’.”
He added: “I also reject the appellant’s argument that the act of obtaining the search results is separate from the provision of the advice. In my view, both the Law Society’s submission and the appellant’s are both species of artificial disaggregation, which disregard the overall nature of the supply.”
Judge McNall concluded that when Brabners obtained search results, and prepared a separate report on them, it was using that information “as part and parcel of its overall service”.
He said: “When that has happened, then the search fees should not have been treated as disbursements, and VAT should have been charged. The payment is part of the overall consideration which the client pays for the service supplied by the solicitor.
“I arrive at the same conclusion when the appellant does not prepare a separate report on the searches.
“Otherwise, the VAT treatment is in danger of simply becoming ‘the law of the paperclip’ – that is, the VAT treatment comes to depend on whether the solicitors happen to send the original searches or a copy to the client or not. That is arbitrary and it cannot be determinative.”
Since 1991, HMRC has been prepared to allow solicitors to treat postal search fees as disbursements on the basis that “the fee is charged for the supply of access to the official record and it is the solicitor rather than the client who receives that service”.
The Law Society argued that electronic searches should be treated the same, but Judge McNall rejected this on the grounds that the appeal did not concern whether the postal concession was right or wrong.
In any event ,“any argument as to consistency would be one as to rationality, or legitimate expectation, and, as such, would be of a character outside my jurisdiction”.
A Law Society spokesman said: “We are considering the implications of this decision for our practice note on VAT and disbursements.”
A spokesperson for Brabners said: “We are disappointed with this outcome and are working closely with the Law Society to understand its full ramifications. We have always complied with Law Society guidelines and are concerned about the impact of the decision on law firms that deal with property conveyancing matters.”
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