The taxing issue of VAT on disbursements

In keeping with this month’s theme of accounting matters, VAT on disbursements remains a thorny issue, and in talking to our clients we have detected considerable uncertainty and inconsistency.

Some do charge VAT: others don’t. HMRC requires certain criteria to be met if a payment is to be treated as non-VATable disbursement. The issue revolves around whether the subject matter of the disbursement (e.g. property searches) are simply passed on to clients or whether the firm uses the information as part of its overall legal services.

In the Brabners case the Tribunal decided that the firm used the information from electronic property searches as part of its overall legal services to the client. The Judge stated:

‘I simply do not regard the Appellant [Brabners] as ‘merely an intermediary used to facilitate payment’… this is not its role in obtaining the search results. It is not just a ‘middle man’. When it obtains search results, and prepares a separate report, the Appellant is using that information as part and parcel of its overall service. 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.’

The Judge went on to say ‘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… In my view, wherever searches are obtained, the payment is part of the overall consideration which the client pays for the service supplied by the solicitor.’

Brabners’ own approach is set out on its website.
HMRC has not updated its guidance – you will find it here.
The Law Society has published useful guidance, here.

We cannot and do not offer accounting advice – the purpose of this is to raise the issue: if you do not charge VAT on for example, search results, Land Registry copy documents and priority searches, then be sure to verify your process with your accountant.