The risk of solicitors being landed with hefty VAT bills for electronic property searches has become a reality for at least one law firm, which has now received a demand from HM Revenue & Customs (HMRC) for tens of thousands of pounds.
It has heightened the call for the tax treatment of postal and electronic searches to be made consistent.
Last year, leading north-west law firm Brabners was ordered to pay £68,000 in VAT for electronic local authority property searches it procured from an agency, after a tribunal ruled that they should not have been treated as disbursements.
The First-tier Tribunal said the searches attracted VAT because Brabners then used the results as part of its advice to clients; the solicitors were not simply acting as a middle man to collect the search fee from the client.
A Bold Legal Group member firm has recently been issued with a pre-assessment notice for a VAT payment, with a potential liability in the tens of thousands in respect of electronic searches.
In the letter, HMRC said: “A solicitor pays a fee for a personal search of official records such as a Land Registry, in order to extract information needed to advise a client.
“VAT treatment: the solicitor can’t treat the search fee as a disbursement for VAT purposes. The fee is charged for the supply of access to the official record and it is the solicitor, rather than the client, who receives that supply.
“The solicitor uses the information in order to give advice to the client and the recovery of this outlay represents part of the overall value of the solicitor’s supply. The solicitor must account for output tax on the full value of the supply.
“Note, where a solicitor pays a fee for a postal search, this may be treated as a disbursement since the solicitor merely obtains a document on behalf of the client. The client will normally need to use the document for their own purposes, such as to obtain a loan.”
Rob Hailstone, who runs the Bold Legal Group, told Legal Futures: “This makes very little sense to me. An electronic search is treated by a solicitor or a conveyancer in exactly the same way and a postal search. The purpose of obtaining the search (electronic or postal) and the way the results are dealt with are identical.
“There must now be hundreds, if not thousands of law firms concerned that they might also get a knock on their doors.
“No one has been purposely avoiding paying VAT, the guidance has been confusing. We must find an equitable way forward that will not penalise firms unfairly and put some at a risk of coming under so much financial pressure that it could prove terminal.”
The Law Society, which intervened in the Brabners case, recently issued interim guidance on the issue, which said: “The Law Society remains of the view that no distinction should be drawn between postal searches and electronic searches. We would expect the tax position for what is essentially the same activity to be consistent.”
It said HMRC was willing to work with the Law Society “to improve its knowledge of current working practices within the conveyancing sector in order to provide clearer guidance to the profession on the VAT treatment of items of expenditure in the future”.
The guidance said HMRC has acknowledged the need to review the position in respect of the postal search concession. “Although it remains available currently, HMRC has ruled out any extension of it to electronic searches.”