A recent story has drawn attention to a key piece of legislation relating to VAT liabilities on property search fees – and it could have a wider impact on conveyancing.
A law firm has been ordered to pay a £68,000 VAT bill for electronic property searches made on behalf of a local authority client. At the time, these searches were treated as disbursements – payments made by a solicitor to a third party on behalf of the client and then claimed back from the client. As the firm was acting on behalf of the client to conduct the searches, this seems an open and shut case.
However, the First-Tier Tribunal ruled in favour of HMRC that the searches should not be treated as disbursements, because the search fees were not simply a repayment of expenditure. Rather, in this instance, the searches provided the solicitors with information, which was then used in order to give advice to the client. The firm was not solely acting as the ‘middle man’ to collect the search fee from the client and therefore the charge should have formed part of the fees for the services provided by the solicitor.
The judge agreed, taking the view that the firm was engaged in transactional work at the time the searches were performed. He was also satisfied that the solicitors knew what they were doing in obtaining the searches and that they were able to carry out the searches quickly and conveniently.
In agreeing with HMRC, the judge rejected the Law Society’s argument that in obtaining the search results, this was separate from the provision of advice, and that the report compiled from the results was part and parcel of the service.
When that happened, said the judge, the search fees “should not have been treated as disbursements”, but rather as a service. Therefore VAT should have been charged on the amount, taking into consideration the overall service supplied by the solicitor, which the client pays for.
There is no doubt that the law firm in question acted in good faith, but this is an important piece of case law, which could well affect other law firms. The Law Society has said they will consider the implications of this decision for VAT and disbursements. For more information relating to VAT, or if you are a law firm and believe you may be affected by this news, contact the WK Law team today to see how we can help.
Introduction of the reverse charge for construction services with effect from 1 October 2019 A business supplying goods or services is normally required to charge VAT and declare this to HMRC. However, with some UK specified supplies, the supplier does not charge and collect VAT on the supply. Instead, the customer is required to account for output tax to HMRC. This VAT is recoverable, subject to the normal rules and the mechanism is called the reverse charge.
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