VAT on online local authority property searches
Article posted: 27th September 2017
We have had several requests for clarity following on from news that north-west law firm Brabners has been ordered to pay £68,000 of VAT not charged to clients on electronic local authority property searches.
The order came after HMRC assessed the firm as liable to charge clients VAT for these searches, despite Brabners not being charged input VAT on them during the period in question.
Below we set out some guidance on this issue.
By HMRC concession, residential property departments and conveyancers can carry out postal searches directly with councils without charging their clients VAT. However, some have employed specialist search agencies to help with electronic searches and this case hung on whether Brabners should have charged VAT to their clients on these searches.
Interestingly, Brabners was buying searches through a specialist agency but was not charged VAT. In turn, the firm was passing on the cost of the searches as a disbursement to clients, also without adding VAT.
HMRC assessed the firm and said it should have charged VAT as the searches were used to form part of the advice given to clients. It also pointed to an internal HMRC manual that said VAT would not be chargeable by either the search company or the solicitor if they passed it on ‘without analysis or comment’.
The First-tier Tribunal judge hearing the case believed that Brabners had acted in good faith. However, he agreed with HMRC that the search results were used to prepare an advisory report to clients on their future property purchase and, for that reason, VAT should have been applied.
The Law Society intervened in the case through written submissions and commenting on the ruling, it said: “The position on local authority searches has changed since HMRC has required local authorities to charge VAT on CON29 and CON29O searches since 1 January 2017 if they were able to do so at that date, and from not later than 31 March 2017.
“The tribunal accepted that HMRC had historically made the concession that postal searches were to be treated as a disbursement, but did not accept the Law Society’s argument that no distinction could be made between postal and electronic searches.”
As a result of this case, the Law Society is now considering the implications of the decision for its practice note on VAT and disbursements.
While the ruling forces Brabners to pay HMRC £68,000 in backdated VAT fees, the firm can appeal this decision at the Upper Tribunal.
This decision is likely to result in an uncertain period for property teams and conveyancers given the volume of searches they will be obtaining over the next few months. The latest figures from HM Land Registry published last week show that 229,895 searches were conducted in August 2017.
However, it should be noted that First-tier Tribunal rulings are not legally binding and Brabners could appeal this decision at the Upper Tribunal.
Nevertheless, firms should be aware that:
- HMRC’s guidance - vtaxper47000 - still refers to postal searches as being non-VATable disbursements.
- The approach to VAT on local authority searches changed on 1 January 2017, rendering the tribunal decision of direct relevance only to historical periods of taxation. Firms should have been charged VAT on searches since then and should now be charging this on to clients (other than for postal searches).
The Law Society is currently considering its practice note on disbursements and it would be prudent to keep an eye open for this when it is published.
If you need any further advice on this issue, please contact either Nick Paterno ( email@example.com ) or Tanya Hamilton ( firstname.lastname@example.org ).
The content of this document is intended for general guidance only and, where relevant, represents our understanding of current law and HM Revenue and Customs practice. Action should not be taken without seeking professional advice. No responsibility for loss by any person acting or refraining from action as a result of the material in this document can be accepted and we cannot assume legal liability for any errors or omissions this document may contain.
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