In Brabners LLP v HMRC [2017] UKFTT TC06093, the First-Tier Tribunal (FTT) found that the charge to clients of search fees by a law firm were not disbursements as they are part of the overall service of conveyancing. VAT should be charged.
Where conditions are met, a supplier can treat the onward supply of services it obtains on behalf of its customer as a disbursement. Where this is the case, that supply is outside of the scope of VAT:
- You must act as the agent of your client when you paid the third party.
- Your client actually received and used the goods or services provided by the third party.
- Your client was responsible for paying the third part.
- Your client authorised you to make the payment on their behalf.
- Your client knew that the goods or services you paid for would be provided by a third party.
- Your outlay will be separately itemised when you invoice your client.
- You recover only the exact amount which you paid to the third party.
- The goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
This case deals with the common practice of conveyancers and how they charge customers for search fees.
- The taxpayer was a law firm with a conveyancing department.
- Conveyancing services were provided to buyers and seller and on instruction the law firm carried out searches.
- The law firm used an online search agency which invoiced them, with no VAT, based on historical concessionary treatment agreed between HMRC and the Law Society.
- The law firm treated this supply as a disbursement, and outside of scope, charging it the customer with no VAT.
HMRC’s view was that the disbursement conditions were not met:
- Search fees should not be treated as a disbursement.
- The fees are not simply a repayment of expenditure incurred in the name and on behalf of the customer.
- The search results form part of the services offered by the law firm and the law firm, not the customer consumes the searches as part of its advice.
HMRC also referred to its internal VAT Taxable Person Manual which suggested that only search fees which are passed on without analysis or comment can be a disbursement, and only if the other conditions were also met. The key, from HMRC’s viewpoint, is how the information is used by the law firm.
The law firm appealed against HMRC’s assessment, on the basis that it was expressly authorised to obtain a search on a client’s behalf and the search belonged to the client.
The Law Society, at the invitation of the FTT also said that the obtaining of the search is conceptually different to the use of the search, i.e. the advice should be separated from the search fee, which should be a disbursement.
The FTT rejected the Law Society’s and the law firm’s arguments:
- VAT law draws a clear distinction in principle between two scenarios:
- When A pays C in the course of making its own supply to B, then that cost is incurred as part of the whole of the services provided to B by A.
- When services are provided by C to B, not to A, and A has merely acted as B’s known and authorised representative in paying C.
- Only the first of these scenarios can be a disbursement.
- The law firm engages for a transaction, part of which involves it obtaining and reviewing the searches.
- The law firm does not say “we will get the searches, but then what you do with them is down to you – you are on your own”.
- When using the search as part of a report or where they are reviewed as part of the conveyancing process, it is part and parcel of the law firm’s overall service.
- It is clear that the law firm is not merely an intermediary used to facilitate payment.
- To allow the separation of the search fees from the services, as the law firm and Law Society suggest, is effectively artificial disaggregation.
- The law firm incurred its cost in order to enable it to provide its service to the client.
This decision could lead to a drastic shift in how law firms charge for search fees.
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Brabners LLP v HMRC [2017] UKFTT TC06093
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