Solicitors could face hefty tax bills following FTT judgment
11 October, 2017
Concerns have been raised that solicitors and law firms could face huge tax bills, after a First-Tier Tribunal ruled that VAT is payable in relation to electronic local authority property searches carried out by third-party firms.
In the case in question, the Tribunal said that the searches should not have been treated as disbursements, and the anonymous law firm involved was ordered to pay some £68,000 in backdated VAT.
The decision came after the Tribunal agreed that the searches were used as part of its advice to clients – rather than simply acting as a middle man to collect the search fee.
The law firm was using the search provider Seachflow between May 2012 and June 2015.
HM Revenue & Customs (HMRC) argued that the searches “constitute consideration obtained, in return for the supply, from their client, and which forms part of the charges for their services”.
It added: “HMRC contends that the information within the search results is used by [the law firm] to give advice to their clients, and hence recovery of the outlay represents part of the overall value of the solicitor’s supply to their client.
By comparison, the Revenue said VAT would not be payable by either the search company or the solicitor if they passed it on “without analysis or comment”.
Judge McNall, presiding over the case, said: “The appellants are not simply a conduit or post-box for search results. Simple common sense dictates that clients engage the appellant in transactional work since the appellant knows what it is doing, knows what a search is, knows what searches to obtain, knows how to get them quickly and conveniently, and knows what to do with them when it gets them.
“In my view, this reasoning can be extended so that silence from the appellant as to the searches which it had done and their results would be taken by most clients as an ‘all-clear’.”
The judgment may have significant implications for law firms who use a search provider or have used a search provider in the past.
A Law Society spokesman said: “We are considering the implications of this decision for our practice note on VAT and disbursements.”
For more information about the tax and financial services Watson Buckle can provide to clients in the legal sector, please contact us.