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VAT and disbursements – Law Society guidance

The Law Society has issued a detailed new practice note ‘VAT Treatment of Disbursements and Expenses’ (8 October 2019) following two recent cases in which the concept of disbursements has been narrowly interpreted. A disbursement is a payment that a business makes on behalf of its client and is outside the scope of VAT. The advantage is that many clients cannot reclaim VAT so not charging VAT to a client will keep their overall costs down.
 
In Brabners it was held that the electronic property searches were supplied as part and parcel of the firm’s overall supply of legal services to the client and as such, those costs could not be treated as disbursements for VAT purposes. The Law Society states it would be sensible for firms to take a conservative approach to what items it classifies as disbursements.
 
Some important points from the practice note are:
  • HMRC’s general approach is that fees for an online record or report which you obtain for a client and then use to provide further advice to a client cannot be treated as a disbursement for VAT purposes.
  • Fees for arranging bank transfers (ie CHAPS and telegraphic) are considered part of the overall conveyancing service provided by a solicitor to their client and cannot be treated as disbursements for VAT purposes.
  • Online search providers – HMRC may argue that the fact that you have made use of the search results or copy documents obtained to provide advice or give certifications means that the supply of the search result is a supply to you and therefore that the cost must be treated as a charge for part of your legal services and subject to VAT at the standard rate, rather than treated as a disbursement, whether or not VAT has been charged by your supplier.
  • Land Registry fees – it should ordinarily be possible for registration fees to be treated as a disbursement.
  • Official copies – it used to be the case that if the solicitor recharges the exact fee to their client, they may treat this as a disbursement and outside the scope of VAT. The Law Society states that this exception will only still apply in limited circumstances, especially as it is now common practice for official copies to be obtained on behalf of any party to the transaction.
  • Local search – LLC1 – postal search fees can possibly still be treated as a disbursement so vat is not payable but following Brabners HMRC may argue that the fact that you have made use of the search results to advise your client or give certifications means that the supply of the search results is a supply to you and therefore that the cost must be treated as part of your overall legal services subject to VAT at the standard rate, rather than treated as a disbursement.
  • Local search – Con 29 – firms should be charging their clients VAT (output tax) and recovering the VAT paid on the CON29 and CON290 search fees (input tax).
  • Personal searches – where a local authority search is carried out personally either by your firm or, as is more common, by a personal search agency, VAT must be charged on the fees.
If HMRC were to successfully challenge a firm on disbursement treatment then the firm may have to bear the additional VAT, interest and any penalties found to be due out of its own resources.
 
The Law Society is at pains to point out that its practice note is not legal advice nor will it answer all questions – but practitioners should be wary of ignoring advice from their professional body – especially if they fall foul of HMRC and their VAT treatment of disbursements. See www.lawsociety.org.uk and Brabners v HMRC [2017] UKFTT 666 (TC) and BA v Prosser [2019] EWCA Civ 547.
 

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