VAT on postal search fees – rules will change from 1 December

A few years ago, the Brabners vs. HMRC case threw into question the VAT treatment that many law firms had been adopting when accounting for disbursements, in particular electronic search fees, that were recharged to clients.

The First Tier Tribunal case confirmed HMRC’s position that, in the vast majority of cases, electronic search fees do not meet the definition of a disbursement and so are subject to output VAT charged to the client, irrespective of whether input VAT had been charged on the inward supply to the law firm.

The decision did not, however, affect the concession allowing law firms to treat postal searches as disbursements, allowing firms to pass these costs on to their clients without output VAT where no input VAT had been charged to the firm in the first place.

HMRC has recently announced that this concession will be withdrawn from 1 December 2020.

It is therefore important that firms review their accounting treatment for these charges and ensure that they are compliant from 1 December. A wider review of all types of disbursement is also highly recommended and firms would be well advised to critically assess their procedures as it seems VAT on disbursements is an area in which HMRC is continuing to take a close interest.

As always, if you need any advice, please contact us as we have VAT and legal sector specialists who are always happy to help.