A judge has ruled that conveyancing solicitors are acting as more than just the client’s middle man when dismissing an appeal regarding electronic searches.
In Brabners v The Commissioners for Her Majesty’s Revenue & Customs, the Law Society intervened in order to assess whether the firm was liable to pay around £68,000 in VAT on fees it owed to third-party agencies.
Brabners had received an invoice from search provider Searchflow without the addition of VAT as this was the routine practice at the time.
Treating this fee as a disbursement and therefore not part of taxable supply, Brabners invoices the client for the fee without VAT.
HM Revenue & Customs contested this, stating that in order for a fee to be treated as a disbursement, it must satisfy the 8 ‘disbursement’ conditions’ set out in Paragraph 25.1 of VAT Notice 700.
These are as follows:
- 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.
As set out in paragraph 22 of the judgement, HMRC also argued that ‘the search fees should not be treated as a disbursement since the fees are not simply repayment of expenditure incurred in the name and on behalf of the customer but rather constitute consideration obtained, in return for the supply, from their client, and which forms part of the charges for their services.’
Judge Christopher McNall stated that as part of the conveyancing services that Brabners was supplying, it routinely makes property searches to make sure that the transaction proceeds smoothly. He stressed that in their role as solicitors, Brabners were expected ‘to identify any risks or other factors adversely affecting the subject property.’
He also stated that the firm is the true consumer of the search results, highlighting that the role of Brabners goes beyond that of a ‘middle man’ in simply obtaining the results.
‘The Appellants are not simply a conduit or post-box for search results. Simple common sense dictates that clients engage the Appellant in transactional work since the Appellant knows what it is doing, knows what a search is, knows what searches to obtain, knows how to get them quickly and conveniently, and knows what to do with them when it gets them. ‘
Intervening and contesting this view, the Law Society argued that obtaining the search results and actually using them within a report for the client ‘are conceptually different’.
Dismissing the intervention of the Law Society and the appeal itself, McNall stressed that arguments from both the firm and Chancery Lane were disregarding the overall nature of the supply. He stated that ‘wherever searches are obtained, the payment is part of the overall consideration which the client pays for the service supplied by the solicitor.’
