HMRC clarifies rules on VAT treatment of postal searches

Following the Brabners LLP VAT case HMRC has announced the withdrawal of a concession in relation to the VAT liability of postal searches. This withdrawal takes place with effect from 1 December 2020 and means that, from that date, postal services can no longer be treated as disbursements when billed onto clients; VAT will be due on these charges to clients.

The changes were announced in this business brief.

The Brabners case concerned the VAT liability of electronic searches recharged to clients and whether they could be treated as disbursements.  A disbursement for VAT purposes must meet certain conditions and, where applicable, the actual cost can be passed on to the client – meaning that if no VAT has been charged, no VAT is payable by the client. This can be important where the client is a consumer, as is the norm for conveyancing. An important aspect is that the goods or services must be purchased for the use and/or benefit of the client and not consumed by the Solicitor. If they are used by the Solicitor they form a component part of the services provided and are therefore subject to VAT in the normal way. In the Brabners case the Tribunal ruled that the searches were used by Brabners in its provision of services to the client and not by the client and as such could not be treated as a disbursement for VAT purposes.

The postal concession was agreed with the legal profession in 1991 and allowed postal searches recharged to clients to be treated as disbursements even where they didn’t necessarily meet the conditions. In the light of the Brabners case, HMRC has determined that it would be inequitable to treat different types of searches differently and so, to level the playing field, HMRC has decided to withdraw the concession. This means that VAT has to be charged on the fees when recharged to clients. Presumably, to allow affected parties to deal with this with clients, the change will take effect from 1 December 2020. This should allow Solicitors time to include VAT in fee quotes given to clients.

As part of a wider exercise on the VAT treatment of disbursements, HMRC has also announced that it intends to produce more detailed guidance on this in due course.