Property search fees are not automatically disbursements

The question is narrower than it sounds and the answer is fairly settled: a property search fee is a disbursement only if the search result is passed to the client without comment or analysis. If your firm uses the information to advise the client or to produce a report on title, the fee is a cost component of your own supply of legal services and is VATable in full. That has been HMRC's stated position since Revenue and Customs Brief 6 (2020), published on 5 June 2020.

The reason firms still get this wrong is that the old position survived on paper. HMRC operated an informal concession from 1991 that allowed postal searches to be treated as disbursements. Brief 6 withdrew it from 1 December 2020, saying plainly that it had no basis in law and was inconsistent with the tribunal's decision in Brabners LLP [2017] UKFTT 0666. That decision held that electronic property search fees were not disbursements, because the firm used the search results in making its own supply.

The eight conditions

Before the search question arises at all, a payment has to satisfy every one of the conditions in VAT Notice 700, section 25.1.1. All eight, not most of them:

• you acted as the agent of your client when you paid the third party;
• your client actually received and used the goods or services;
• your client was responsible for paying the third party;
• your client authorised you to make the payment on their behalf;
• your client knew the goods or services would be provided by a third party;
• the outlay is separately itemised when you invoice the client;
• you recover only the exact amount you paid;
• the goods or services are clearly additional to the supplies you make on your own account.

Read against a residential purchase file, the second, third and eighth conditions are where searches usually fail. The client did not receive and use the local authority search result; the firm did, and then wrote a report about it. That is the whole of the Brabners reasoning in one sentence.

What HMRC accepts, and what it does not

HMRC's own guidance for solicitors lists items it treats as disbursements: court fees, land charge and Land Registry fees, probate fees, stamp duty and incorporation fees, along with estate agent's commission, the fees of notaries, surveyors and witnesses, and charges for police and medical reports.

It does not accept two categories that firms recharge constantly. The first is telegraphic transfer and CHAPS fees. HMRC's position is that the bank supplies that service to the solicitor rather than to the client, so the fee when recharged, even at cost, is part of the value of the solicitor's own supply and VAT is due on the full amount. The second is travel, accommodation, telephone and telex charges, following Rowe and Maw.

The transfer fee point catches almost every conveyancing firm in the country, because the completion statement is where it appears and the completion statement is rarely reviewed with VAT in mind.

The line in Notice 700 that was never updated

Here is the trap, and it is HMRC's rather than yours. VAT Notice 700 at section 25.1.3, Example 2, still says that where a solicitor pays a fee for a postal search, this may be treated as a disbursement. That sentence was overtaken by Revenue and Customs Brief 6 (2020) from 1 December 2020 and has never been removed from the Notice.

So a firm that looks the question up in the Notice — the obvious place to look — finds an answer HMRC no longer applies. Work to the Brief. The concession was withdrawn on 1 December 2020, and the same example in the Notice also confirms the underlying principle against the firm: on a personal search of official records used to advise the client, it is the solicitor rather than the client who receives that supply.

An illustrative example of the exposure

Take a firm completing 300 residential purchases a year, with £200 of search fees on each file that carried no VAT when the firm paid for them, and the searches used to produce the report on title. The figures are illustrative.

Treated as disbursements, £60,000 a year passes through the bills with no VAT attached. On HMRC's test those searches are a cost component of the firm's own supply. If the firm can add VAT to what it charges going forward, that is £12,000 a year of output tax the client pays. If it cannot — because the bills have already been rendered and the amounts charged are what they are — the sums already collected are treated as VAT-inclusive, and the VAT fraction of one sixth gives £10,000 a year out of the firm's own margin. Over a four-year assessment window that is a number that changes a firm's year.

The arithmetic flips where the search provider charged VAT and the firm recharged at cost. There the firm was entitled to reclaim the input tax it never claimed, and the net exposure is much smaller. That is precisely why the exercise is worth doing file-type by file-type rather than assuming the worst or the best.

What to do this week

• Split your searches into two lists. Which search results are genuinely passed to the client without comment, and which feed the report on title? The second list is not made up of disbursements.
• Look at the completion statement template. Telegraphic transfer and CHAPS fees belong above the VAT line, not below it: HMRC's own example says the bank supplies that service to the solicitor rather than to the client, so the recharge is part of the firm's own supply and VAT is due on the full amount. A template is worth checking because it repeats itself on every file.
• Check the input tax position. Where a supplier charged you VAT on something you have been treating as a disbursement, you have been giving away recoverable input tax as well as misclassifying the output side.
• Check your published prices. The SRA Transparency Rules require a firm publishing the availability of residential conveyancing to publish a description and cost of likely disbursements, and whether fees or disbursements attract VAT and if so the amount. Getting the VAT treatment wrong therefore creates a second, regulatory exposure on top of the tax one — and the SRA runs proactive web sweeps, with fixed penalties of £750 for a first breach and £1,500 for a subsequent breach within three years.
• Write the policy down. One page, agreed by the head of conveyancing and whoever raises the bills, is what stops the treatment drifting back.

Why this sits with your accountant, not just your VAT return

Disbursement classification is not only a VAT question. Money held for disbursements interacts with the Accounts Rules, because Rule 2.1 treats money held in respect of your fees and unpaid disbursements before you deliver a bill as client money, and Rule 2.2 only lets you keep that money outside a client account in narrowly defined circumstances. A firm that misclassifies a disbursement can therefore create a client account problem as well as a VAT one, which is why we look at both together in client account bookkeeping, in our VAT and disbursements guide and in our guide to the Accounts Rules.

If the ledger side is where this unravels for you, Xero for law firms covers how the office and client sides are kept apart in practice, and law firm accounts and tax explains what we take on. This is general information rather than advice on your firm's files.