Can Electronic Property Searches be treated as VAT free disbursements?
A recent case at the First Tier Tribunal will be of interest to law firms offering conveyancing services.
A firm of solicitors bought on-line local authority property searches through a third party agency. The agency was not charged VAT by the local authorities concerned and they correctly passed the cost to the solicitors as a VAT free disbursement. It clearly acted as agent for the solicitors in obtaining the searches for them and met all of the conditions listed in VAT Notice 700 paragraph 25.1 for treatment as a disbursement.
However, HMRC successfully argued that as far as the solicitors were concerned, the disbursement conditions were not met in order for them to be seen as acting as a mere agent or conduit for the searches to be provided to their clients.
The Tribunal concluded that as the solicitors were engaged by their clients to confirm (or otherwise) that the proposed transaction was safe to go ahead they used the searches in making their supply of conveyancing services in much the same way as travelling or subsistence expenses. As such they formed part of the supply liable to VAT.
The Tribunal acknowledged that this was a departure from the concessionary treatment for postal searches agreed with the Law Society so it will be interesting to see if the concession survives.
In the meantime, it will be important to distinguish the VAT treatment of electronic searches from postal searches and account for VAT accordingly. No doubt HMRC will be looking very closely at the treatment of disbursements on their routine VAT visits with a view to raising assessments for VAT undercharged in the last four years. Therefore in order to avoid penalties, it would be a good idea to pre-empt any assessment and make a disclosure as soon possible.
For further information please contact:
Head of VAT Services