Solicitors working on property matters often carry out Local Authority searches for clients to obtain information concerning planning, environmental health and building control.
Between January and April 2017, HMRC phased in a requirement for Local Authorities to charge VAT on their property searches. Since then, some solicitors have recovered the VAT incurred and charged VAT on the onward supply of the search to the client.
Prior to 2017, Local Authorities didn't charge VAT on searches so many law firms may passed on the cost to clients as VAT-free disbursements.
A recent tribunal decision concerning the VAT treatment of electronic property searches may have consequences for law firms that treat these as disbursements.
Due to this, HMRC may now decide to assess other law firms for uncharged VAT on disbursements in the last four years. Firms that paid for these disbursements out of client money are no longer be able to do so.
To reclaim and recharge VAT correctly in Access Legal Fusion, third party costs need to be posted as a disbursement. Use of the purchase ledger system and/or anticipated disbursements can be used to process supplier statements received on a monthly basis.
Statements processed as nominal to disbursement journals still work, as long as firms re-charge VAT at the billing stage. Firms requesting money in advance can either:
Leave it in the client account.
Or, if the terms and conditions allow, transfer it to the office in advance of a future bill.
Update: A note on the Law Society website states:
'In the absence of any binding adjudicated decision on the subject, we suggest that firms follow HMRC's published guidance on the treatment of searches.” HMRC‘s published guidance can be found in ’VAT Notice 700: the VAT guide‘, and a linked guidance document entitled, ’VAT: costs or disbursements passed to customers‘. They state that payments made on behalf of clients, for goods or services received and used by them may be treated as ‘disbursements’ for VAT purposes and passed on to clients without VAT being added if, and only if, all of the following conditions are met:
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.'
The Law Society‘s current position is far from clear. However, it is HMRC’s view that property related search fees, when undertaken online, fail to meet all of the above criteria and should not be treated as disbursements for VAT purposes.
HMRC deem that solicitors use the electronic local authority property search result when advising their clients in connection with the conveyance of a property and aren't, therefore, simply acting as an agent of the client when undertaking the search.