VAT and solicitors’ disbursements
In June 2020, HMRC released their Revenue & Customs Brief 6 (2020) in respect of the VAT treatment of property search fees charged by solicitors and conveyancers.
This confirmed the withdrawal of the ‘postal concession’ from 1 December 2020. This concession allowed solicitors and conveyancers not to charge VAT on fees for property searches conducted by post, even where the disbursement conditions were not met. This is a further consequence of the VAT tribunal decision in Brabners LLP, where it was confirmed that electronic (online) search fees were not disbursements. This was because the searches in question were supplied to the law firm which then used them as part of its own overall supply of legal services to the client. In this situation the costs could not be treated as disbursements for VAT purposes.
You may find it helpful to have a reminder of the conditions for disbursements, as detailed in the 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
The difficulty for solicitors is that they may meet the cost of statutory charges on behalf of clients, act as co-ordinators in relation to client transactions or even incur costs themselves that they can attribute and recharge to clients. It is therefore important that solicitors carefully consider whether the disbursement conditions are met in each situation, should they wish to treat costs as disbursements when charging clients. Getting it wrong could prove costly.