The Brabners LLP V HMRC First Tier Tribunal (FTT) case involved whether electronic, local authority search fees paid to Searchflow (a specialised online search agency) by Brabners were to be treated as disbursements.

It had been standard practice since September 1994, after HMRC agreed with the Law Society that local authority postal search fees could be treated as disbursements for VAT purposes.

The judge agreed with HMRC’s view that the electronic search fees had been incurred by Brabners “in the course of making its own supply of services” to its clients. The Tribunal dismissed Brabners appeal as it was satisfied that they had obtained the search records as an integral part of the legal services that it provided, and that the conditions in Notice 700 Para 25.1.1 (which relate to disbursements) were not satisfied.

The judge states “In my view, wherever searches are obtained, the payment is part of the overall consideration which the client pays for the service supplied by the solicitor”.

This decision is at odds with that in the earlier case of Barrett, Goff and Tomlinson v HMRC (FTT). In that appeal the Tribunal came to a different conclusion when considering the treatment of fees paid by the appellant firm of solicitors for medical records and reports obtained in connection with personal injury claims. The Tribunal allowed the appeal and the medical records and reports were allowed to be treated as disbursements.

However, in Brabners, the tribunal commented that in Barratt, the tribunal was dealing with a different scenario. He said that in Barratt the medical records were confidential but the searches of property records were in the public domain.

The treatment between the historical postal searches concession and the types of electronic searches mentioned in the Brabners case are clearly inconsistent. It needs noting that the Brabners case is just a First Tier Tribunal and as such is not legally binding.

However, the fact that HMRC took the case to tribunal is probably an indication of how they see the VAT treatment of searches going forward. They could even remove the original concession.

Most solicitors have followed the Law Society’s Practice Note on VAT and disbursements – 10 March 2011. It states “Land Registry Fees – Following agreement with HMCE in September 1994, when a seller’s solicitor obtains an office copy entry and recharges the exact fee to his client he may treat it as a disbursement and outside the scope of VAT.

It is now common practice for official copies to be obtained on behalf of any party to the transaction; seller, buyer or mortgagee. It is the Society’s view that this may be treated as a disbursement, provided you recharge the exact fee.”

In the light of the Brabners decision we believe that solicitors have two options. The first is to hold off taking any action until the Law Society has updated its guidance note on VAT and disbursements and/or an Upper Tier Tribunal has made a ruling on this matter and/or HMRC has updated its guidance.

The second option is to add VAT to all recharges of costs for searches going forward. This will protect the solicitors VAT position for the future. If the Brabners decision is overturned, this VAT will be reclaimable from HMRC within a four-year timeframe, as long as it is paid back to the client. Both options can be sustained as taking a reasonable approach, but option two does pass the risk onto the clients so may be more attractive commercially.

The Brabners decision appears to focus on local authority search fees via agencies such as Searchflow, rather than HM Land Registry fees. But it is difficult to see that there is any substantial difference between HMLR search fees and local authority fees.

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Tony Nickson

VAT Consultant, Sheffield