HMRC To End VAT Search Concession
For property lawyers, the issue of VAT on local authority searches has been controversial thanks to the ruling in Brabners v HMRC [2017] UKFTT 0666). The wider issue of VAT on disbursements also arose in a later ruling.
It is an important and a touchy issue; and HMRC has announced it will withdraw the so-called postal concession in December. Disbursements – payments made by a business on behalf of its client – are not taxable so clients are not then charged VAT.
In Brabners¸ HMRC won a significant victory when it won its argument that electronic search fees are a taxable supply, not a disbursement; and were wrongly charged by law firm Brabners to clients as disbursements. The decision of the First Tier Tribunal was based on the rationale that search fees went beyond a simple repaying of expenditure paid out on the client’s behalf but formed part of their charges for the firm’s services.
However, HMRC and the Law Society had a long-standing agreement (dating back to 1991) allowing postal search fees to be treated as disbursements, to reflect that the fee is charged for the supply of access for the solicitor to the official record, though there was no legal basis for this arrangement .
The ruling left the firm facing a tax bill of £68,000; and worried property and conveyancing firms urgently re-examining their charging policies to ensure the VAT element of searches are passed onto clients.
It was later followed by a separate ruling, in British Airways v J. Prosser [2019] EWCA Civ 547, in which the Court of Appeal clarified the issue of VAT in the context of medical expert reports commissioned by solicitors.
There then followed a new practice note published by the Law Society on the VAT treatment of disbursements and expenses in view of these two rulings.
What now?
HMRC has announced it will withdraw the postal concession for VAT disbursements treatment of property searches on 1 December 2020 to ensure consistency with the Brabners ruling. All conveyancers, and solicitors who need to obtain postal property searches in the course of their practice, must be aware of this and ensure their practices and procedures reflect the change come December.
So why now? In its announcement, HMRC stated that allowing fees for postal searches to continue to be treated as VAT disbursements in all cases is inconsistent with Brabners. A further factor behind the decision is that in HMRC’s view, because of changing industry practices it is more than likely that postal searches have become obsolete and are rarely used.
Revised guidance on VAT disbursements will follow to ensure there is consistency.
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