HMRC Remove Concession for Disbursement Treatment of Postal Searches for Solicitors and Conveyancers
Is This a Precursor to Stricter Application of Disbursement Rules?
HMRC announced on 5 June 2020 in Revenue and Customs Brief 6 (2020): VAT treatment of property search fees charged by solicitors and conveyancers the removal of the 1991 concession allowing solicitors and conveyancers not to charge VAT on fees for property searches conducted by post, even though this did not meet all the disbursement conditions set out in section 25.1.1 of HMRC’s VAT Notice 700. The concession is formally withdrawn from 01 December 2020.
The removal of the concession is not unexpected especially given the Law Society argued in Brabners LLP  UKFTT 0666 (TC) that the concessionary treatment of postal searches is correct, and that there is no apparent difference between postal searches and electronic searches, therefore it would be inconsistent or anomalous for electronic search fees to be treated differently from postal search fees. HMRC has now followed this logic, unfortunately not in the way argued by the Law Society. HMRC clearly were concerned that they were undermining their own argument not least risking a legitimate expectation challenge.
HMRC have also stated that following the withdrawal of the concession on 01 December 2020 it will publish revised guidance on VAT disbursements to ensure consistency and provide clarity. Whilst clarity is welcomed, the timing of the removal of the concession is indicative that HMRC will take a more strict interpretation of what qualifies as a disbursement and in removing the concession HMRC likely had one eye on future litigation.
What is a disbursement?
HMRC’s view on the conditions for disbursement treatment is set out in section 25.1.1 of HMRC’s VAT Notice 700.
You may treat a payment to a third party as a disbursement for VAT purposes if all 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.
All these conditions must be satisfied before you can treat a payment as a disbursement for VAT purposes.
Whilst clearly there are some grey areas, any payments made where it could be argued that a business is doing more than acting as mere postbox i.e. providing without comment or analysis or the payment could be argued to form part of the supplier’s own supplies are likely to be challenged by HMRC.
It is also important to reiterate that applying the “we charge VAT when we are charged VAT” approach common in particular with statutory fees does not necessarily lead to the right answer. Treatment should be considered on a case by case basis.
Solicitors and conveyancers (and indeed other businesses) need to critically assess what they treat as disbursements for VAT purposes.
We are aware of HMRC compliance activity against law firms and incorrect treatment could lead to assessments going back 4 years.
Impacted businesses need to:
- Establish what is currently treated as a disbursement and who makes that decision e.g. fee earners or finance teams. Our experience is that law firms still do not consider treatment on a case by case basis and decision-making is assumed to be done by someone else.
- Undertake a review for any historic exposure.
- Review current procedures on disbursement to ensure application of the correct treatment going forward and appropriate evidence kept e.g. written client authorisation.
- Upskill staff on the VAT disbursement rules.
We can assist businesses in evaluating the impact, assessing historic exposure and developing strategies for minimising the financial and practical impact.