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VAT on Disbursements: Update

March 2018

Regular readers of our newsletter will be fully aware of the impact of the Brabners LLP ruling which threw many solicitors' firms into a state of panic last Autumn over the treatment of VAT on disbursements.

In this update we look at the implications of the Brabners LLP ruling for law firms six months on from the publication of the judgment in this case, delivered by Dr Christopher McNall. If you are not familiar with the facts of this important VAT case, you are advised first to read our article, ‘VAT on Disbursements: Are you getting it right?’.

In the aftermath of the Brabners LLP v HMRC ruling, many professional advisers were suggesting to other firms of solicitors who have treated online property search fees in a similar fashion to Brabners LLP (that is to say, by passing the cost on to the client as a disbursement which was not subject to VAT), to wait and see whether or not Brabners LLP lodged an appeal against the ruling before deciding what to do about their own position. With more than six months having elapsed since the publication of the First Tier Tribunal's finding, and with no indication that an appeal by Brabners LLP has been made or is likely to be made, that advice, at best, is looking questionable now.

Under existing VAT legislation, a taxable person has an obligation to take steps to correct errors or inaccuracies on a VAT return that has previously been submitted. As a result of the Brabners LLP case, if other legal firms have treated property search fees in the same way that Brabners LLP had been doing, they are now on notice that such treatment was incorrect and, as a result, that their previous VAT returns are similarly inaccurate and should be corrected. The issue here being that a firm may be liable to a penalty and interest where previous errors or inaccuracies are careless or deliberate. Whilst there is no suggestion that Brabners LLP had acted in a way which was either careless or dishonest, the position is different for other firms in a similar situation as they now know that the treatment of VAT on property related searches is wrong in the view of HMRC and the First Tier Tribunal. Any firm correcting a previous error, on a timely basis, as a consequence of the Brabners LLP ruling is unlikely to face a penalty or interest charges as HMRC would, most likely, accept the error as a ‘non-careless error’. However, as time moves on, if previous inaccuracies or errors on VAT returns already submitted are not corrected by solicitors‘ firms, it is increasingly likely that HMRC may seek to impose penalties and interest on the basis that the firm has failed to take timely corrective action, causing the inaccuracy to be treated as a ’careless error'.

Additionally, the Law Society has recently updated its guidance on the treatment of VAT on disbursements following the Brabners LLP case. A note on the Law Society website states, “In order to address this in a meaningful way which takes into account the views of our members, the Society is establishing a working group to assist in providing updated guidance to the profession in respect of the VAT treatment of disbursements. In the meantime, in the absence of any binding adjudicated decision on the subject, we suggest that firms follow HMRC's published guidance on the treatment of searches.”

HMRC‘s published guidance can be found in ’VAT Notice 700: the VAT guide‘, and a linked guidance document entitled, ’VAT: costs or disbursements passed to customers‘. HMRC’s stance on the treatment of disbursements has not changed in a number of years. They state that payments made on behalf of clients, for goods or services received and used by them may be treated as ‘disbursements’ for VAT purposes and passed on to clients without VAT being added if, and only if, all of the following conditions are met:

  • you acted 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 (this condition usually prevents the agent's own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
  • your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client)
  • 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

The Law Society‘s current position is far from clear. However, as we know, it is HMRC’s view that property related search fees, when undertaken online, fail to meet all of the above criteria and should not be treated as disbursements for VAT purposes. HMRC deem that solicitors use the electronic local authority property search result when advising their clients in connection with the conveyance of a property and are not, therefore, simply acting as an agent of the client when undertaking the search.

If you would like to know more about the Brabners LLP case, the treatment of VAT on disbursements in general and what to do if you are in a similar situation, why not book a place on one of the two VAT themed webinars taking place on Tuesday 27 March 2018? Our full three-hour ‘VAT for Solicitors’ webinar will cover a range of topics impacting upon those in the legal sector whilst our one hour ‘VAT on Disbursements’ webinar will focus on the sole topic of the treatment of disbursements for VAT purposes. All of our webinars are ‘live’ webinars where delegates have the opportunity to ask questions as if they were in attendance at a classroom-based seminar. A recording of the webinar can be viewed for a period of fourteen days following the live webinar, allowing those unable to attend on the day the opportunity to watch the recording online at their leisure.

If you would like to attend, please book your place using the links above or call us on 0330 223 5346 or e-mail us at

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