Solicitors’ treatment of disbursements in doubt

Following the recent case of Brabners LLP and HMRC, Brabners have been ordered to pay £68,000 in VAT as HMRC claimed that electronic property searches should not have been treated as disbursements for VAT purposes. Accountancy firm Saffery Champness is warning that there may be further repercussions for law firms and their clients.

VAT specialist Sean McGinness, based at the Edinburgh office of Saffery Champness, says that there is a risk that HMRC will look at other firms, who would do well to consider the consequences.

He said: “There is a risk that not only will HMRC be looking at future disbursements (both search fee and potentially other disbursement), but they may also look at invoices issued in the last four years where VAT has not been applied to disbursements. The VAT treatment, both historically and going forward will depend on the facts of the outlays and how they have been contracted for.”

Prior to searches becoming subject to VAT, they were treated as a VAT free disbursement, on the basis that the data was ultimately for the benefit of the end client.

However, HMRC argued that the law firms were not passing the data on as it was received, but were using it to advise clients, and therefore should have been recharged to the client with VAT as part of their services.

Mr McGinness added that law firms should review their disbursement treatment urgently: “Lawyers should review existing process and seek advice regarding how HMRC rules on disbursements will be applied.

“We expect that the law societies will issue new guidance in this area and will be liaising with HMRC. However, we would recommend that firms act now to understand whether they have a potential historic issue and/or whether a change in billing process is required.”

“The downside for consumers is that the existing process of VAT free outlays may change, making services more expensive for the end user.”