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Uncertainty for solicitors’ tax costs after ruling on digital searches

Solicitors are being warned by experienced accountants Newby Castleman about the potential consequences of a legal ruling which may see firms having to charge VAT on digital searches carried out on behalf of their clients.

Many law firms treat electronic local authority searches and other such searches, commonly undertaken on behalf of clients looking to purchase property, as disbursements, meaning they do not charge VAT on the cost of the search when billing their clients for the work. 

In the First-tier Tax Tribunal of Brabners LLP versus HMRC however, this practice was challenged, as HMRC successfully argued that such fees were not repayments of costs incurred on behalf of customers, but that the information was used by the solicitor to give advice to its clients, making the costs subject to VAT as part of solicitors’ fees. 

Brent Goodwin, VAT Manager at Newby Castleman, said, “HMRC has effectively ripped up a long-standing concession on allowing postal property searches to be treated as disbursements, for although this agreement remains in place most firms have moved away from this traditional format to the digital alternative.

“When agreeing the concession in 1991 the parties would not have envisaged the development of the digital alternative and HMRC now appear to be taking advantage of the advance in technology to effectively remove this concession.

“The tribunal’s decision could have major consequences for smaller firms of solicitors in particular, many of whom will have simply been following what they took to be standard practice in treating digital property searches as VAT-free disbursements.

“Any change may impact solicitors’ current and future billing arrangements, and might even have a bearing on disbursements from already settled accounts from as far back as four years ago, meaning lawyers will have to consider either meeting this cost themselves or look to collect VAT from their clients retrospectively.”

Brent concluded,

“Both HMRC and the Law Society need to agree what the standard practice should be regarding this extremely commonplace procedure, as many solicitors are not currently aware of any possible changes and are continuing to treat these searches as VAT-free disbursements.”

Law firms are advised to review their VAT treatments and monitor developments on this case. For further information and professional advice on this and any other financial matters, please contact Newby Castleman.

Newby Castleman is one of the Midlands’ leading independent accountancy firms, with offices in Leicester and Loughborough. It offers a range of specialist financial services, business and tax advice for individuals and businesses. For further information, telephone the Leicester office on 0116 254 9262, the Loughborough office on 01509 263500 or visit the website at www.newbycastleman.co.uk.


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