Searches as disbursements: What next for the industry?
Industry bodies have shared their response to a recent case which questioned whether search fees would be classed as disbursements when charging a client during a conveyancing transaction.
In a decision released last month, the judge in Brabner’s v The Commissioners for HMRC concluded that search fees should not be treated as disbursements and are therefore liable for VAT to be charged. This was based on the fact that the firm prepares a separate report on the search results and is, therefore, using the information from them ‘as part and parcel of its overall service’.
The judgement also drew attention to the allegedly frequent practice of charging search fees as disbursements, raising questions for conveyancers and industry practice going forward.
Despite this uncertainty, a number of organisations within the industry have shared their views on the case and the resulting decision.
Taking the stance that the decision does not acknowledge the operation of the conveyancing process, the Society of Licensed Conveyancers criticised the judgement stating that they would hope for a further review.
“Quite simply, a conveyancers fee is applied in respect of the work the conveyancing lawyer undertakes in analysing all the data that is obtained on behalf of the client and for providing advice to the client accordingly. The information provided in searches is but one element of all the data which is gathered and it is, of course, the case that VAT is levied on the conveyancers fee. To suggest that VAT should be applied in respect of the cost of searches, on the basis that the conveyancers analysis and advice is in some way wrapped into their cost demonstrates a lack of understanding of how the conveyancing process works.”
In contrast, HMRC has said that they welcome the decision, which they state has introduced clarity to the correct VAT treatment of property searches.
“Our existing guidance regarding online searches as set out in the judgment still applies. If a solicitor considers that they have incorrectly treated a search fee as a disbursement they should follow our guidance in VAT Notice 700/45 ‘how to correct errors and make adjustments or claims’.”
For search providers, however, the conclusion is less clear. It would appear that they are waiting for a statement to be issued by the Law Society or regulatory body before they are able to take a clear position on where the industry stands.
Meanwhile, the Law Society has stated that it is currently considering the implications of the case. It also intends to update advice to solicitors as soon as possible.
Despite the promise of guidance being provided, this doesn’t provide much help for conveyancers now. Until a clear outcome is reached, however, it has been recommended that searches are not treated as disbursements so firms avoid the risk of having to pay the necessary VAT later down the line.