Since 1991 solicitors have been able to treat postal searches as disbursements for VAT purposes i.e. pass the cost of these searches onto the client without VAT. On 5 June 2020, HMRC announced the concession will be formally withdrawn on 1 December 2020.
The First-tier Tribunal decision in Brabners LLP (2017) TC 06093, agreed with HMRC that electronic (online) search fees were recharges and not disbursements. Allowing postal search fees to continue to be treated as disbursements in all cases is inconsistent with that decision. The concession has also caused confusion on the correct treatment of payments as disbursements. This is because it does not align with HMRC’s policy on the VAT treatment of electronic searches.
Don’t forget, if a lawyer advises on the contents of a search report, the supply from the search provider becomes an overhead of the practice and an additional fee to the client subject to output VAT, irrespective of whether the supply to your business contained input VAT or not. HMRC’s stance is that 99.9% of the time, a lawyer uses and advises on the contents of a search report resulting in the search fee not qualifying as a disbursement for VAT purposes under Notice 700.25. Therefore, it is the business, and not the client, which purchases the search report in order to improve the way it provides its own services. The search providers supply is supplied to and used by the business and NOT the client. If (and it’s a BIG IF), you can provide sufficient evidence that you did not advise or comment on the search results and simply passed the document on to the client to make an informed decision themselves, you may pass it on as a disbursement for VAT purposes (agency payment) i.e. not accounting for either Input or Output VAT and not including it on your VAT invoice to the client i.e. a completion statement.
The ILFM’s recommendation is to protect your position by treating these types of transactions in accordance with HMRC’s view, which is that the VAT liability of the recharge to the client will follow the VAT liability of your overall supply to the client, and thus almost inevitably will be subject to standard rate VAT. This will only impact on transactions where VAT has not already been charged on the original cost. There should not be any cost to the practice, as it is the client that will suffer the additional VAT.
As a final note, when trying to ascertain whether a payment qualifies to be treated as a Disbursement for VAT purposes, the ILFM strongly recommends you follow the criteria as set out in HMRC’s Notice 700 25.1.1, questioning each payment and the circumstance in which it was incurred and more importantly, questioning who received, used and benefited from the third party supply i.e. is it the practice or the client? Unfortunately, a list of what is and what isn’t a Disbursement for VAT purposes cannot be easily drawn up as some payments can be either depending on the circumstances in which they were incurred.
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