Following on from our briefing note released in September on the recent ruling issued by the First Tier Tribunal on the Brabners case, we have received various queries on the subject. For reference, a copy of that briefing note can be found here
To ensure that the answers to these queries are available to all, this second briefing note addresses those frequently asked questions.
1. Does the ruling extend to all types of searches, including the exempt elements of Local Authority searches and searches made on the Land Registry site?
From a review of the commentary made by the First Tier Tribunal judge it would appear that his view is that this ruling extends to all searches. However the actual decision only references electronic searches.
Until further comment is made by HMRC and/or The Law Society, it is unclear as to whether the decision does extend to non-electronic searches or not.
As there is the threat of HMRC looking to assess for an under-declaration of VAT historically, it may therefore be prudent to apply VAT to all search fee recharges, until the position is clarified.
2. If a third party, such as counsel, includes a charge for searches on their invoice without charging VAT, if this is then re-charged on, should VAT be added?
Our view here would be yes, VAT should be charged on the full cost incurred from the third party, including any non-vatable disbursement charged.
Going forward, as a result of this ruling, it is likely that the third parties will also now be required to account for VAT on the recharge of the search fee.
3. Could we separate our costs and account for VAT only on the charge for reporting on the search results, with the actual search fee remaining as a non-vatable disbursement?
Based on the decision of the case, it would appear that HMRC would argue that the supply from the search provider is then being used by the law firm in order to provide advisory services to their clients.
Therefore in the first instance, the law firm is the recipient of the supply rather than the ultimate customer. Due to this the onward supply cannot be treated as a disbursement and therefore must have VAT applicable to it.
4. Where VAT has been charged on the search fees, can we still treat this as a disbursement rather than a vatable recharge?
Our advice here would be to treat this as a vatable recharge rather than a disbursement. You can recover the input VAT incurred and the re-charge this on as output VAT. This would then allow any commercial VAT registered customers to potentially recover the VAT charged to them, whereas treating the search fees as a disbursement would take away this possibility.
5. Are Land Registration fees which are paid on behalf of the client to HM Land Registry to get titles registered subject to the same VAT issue?
At this point there is no indication that this ruling will extend to these costs and these should therefore continue to be treated in the same manner as they have been historically.
We will however consider this further once The Law Society has commented on the decision to see if there are any changes to this view.
6. What are the conditions that need to be satisfied to allow a transaction to be treated as a disbursement?
There are eight conditions that all need to be met to allow a payment to be treated as a disbursement, as follows:
you paid the supplier on your customer’s behalf and acted as the agent of your customer
your customer received, used or had the benefit of the goods or services you paid for on their behalf
it was your customer’s responsibility to pay for the goods or services, not yours
you had permission from your customer to make the payment
your customer knew that the goods or services were from another supplier, not from you
you show the costs separately on your invoice
you pass on the exact amount of each cost to your customer when you invoice them
the goods and services you paid for are in addition to the cost of your own services
7. If HMRC were to look to assess for historic VAT, how far back can they go?
For non-deliberate errors HMRC are entitled to go back four years. As this is an output VAT error, as at today’s date of 28th September 2017, HMRC could go back as far as the quarter ending 30th September 2013 to assess for any perceived errors.
8. What can be done about the historic position?
Until further guidance is received from The Law Society on the matter, we would not suggest that any disclosures for potential historic underpayments are made.
It would however be wise to begin reviewing your position and identifying any potential exposure.
9. What can I do to protect myself?
As there is now a heightened expectation that HMRC will look to target law firms for VAT inspections, it would be advisable to consider a VAT healthcheck review of your business to ensure that all areas of your VAT accounting are compliant.
A health check review is a service offered by Armstrong Watson, and would be completed by an ex-HMRC officer, who after 39 years of service with HMRC, has the ability to give a unique insight into the other areas that HMRC may look to focus a review upon.
If you'd like more information about health check reviews, please get in touch
