The decision reached in Brabners v The Commissioners for HMRC has caused a stir in the conveyancing industry. The appeal was dismissed in Liverpool on 28th April 2017 and the judgment, delivered by Dr Christopher McNall, was released on 5th September, raising questions about what will happen next.
The issue at the crux of the case was whether electronic searches should be classed as a disbursement or not when charging clients in conveyancing matters.
The Appellant’s argument was that the client had requested or expressly authorised them to obtain a search on their behalf, meaning they are merely acting as the client’s agent. Brabners argued that as the report belongs to the client, it should, therefore, be charged as a disbursement.
However, the judge concluded that as a conveyancing service provider, part of the Appellant’s duty to its clients is to take reasonable care and skill. The Appellant routinely makes electronic property searches to ensure that the transaction can safely go ahead for the client. This means as solicitors, the client is expecting them to identify any risks or other factors adversely affecting the property.
When the Appellant obtains search results and prepares a separate report on those results, it is using the information from the searches ‘as part and parcel of its overall service’. In this case, it was held that the search fees should not be treated as disbursements and VAT should be charged. In other words, the conveyancers are more than just the middleman when dealing with electronic searches.
The payment is considered part of the overall consideration which the client pays for the service supplied by the solicitor, and is the same even if the Appellant does not prepare a report on the searches. This is to avoid VAT only being applied when the solicitors have given advice on the search results.
The judge noted that charging searches as a disbursement seems to be, unsurprisingly, a conventional conveyancing practice, and is not a case of dishonesty, misconduct, tax avoidance or evasion.
The judge also commented that he is bound to disregard the impact of his decision more widely in the legal profession as part of his process of reasoning and decision making. Whilst this is, of course, important for the outcome of this case, it does raise the question of what it will mean for the conveyancing industry.
When speaking to conveyancers, some believe that HMRC may now look to target firms for an under-declaration of VAT in relation to the recharge of search fees to their clients. This is a worry for the industry.
In the meantime, it may be the safest option to treat searches as a vatable recharge rather than a disbursement, to avoid any repercussions following the decision in this case.
It remains to be seen what will happen in the future, but it appears a sensible approach for conveyancers to protect themselves from the risk of being targeted for under-declaration of VAT in the future.
