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You may have heard recently about the case of Brabners LLP v HMRC where the tribunal judge held that electronic property search fees could not be labelled disbursements for VAT purposes, leaving Brabners with a hefty £68,000 VAT bill and law firm accounting departments across the country with sweaty palms.
So where does the decision leave us? It should be said that the decision was at Tribunal and so isn’t binding on any other court, but still, many are left in limbo as to how to treat searches. So, to try and answer the question, lets go back to basics…
What is a disbursement?
A disbursement is a cost which is then charged to the client. As the firm isn’t providing any value and simply pass on the information or product which has been purchased, no VAT is chargeable.
Paragraph 25.1 of VAT Notice 700 lays out the 8 ‘disbursement conditions’, each of which must be fulfilled for a cost to be classed as a disbursement. They are:
- You acted as the agent of your client when you paid the third party
- Your client actually received and used the goods or services provided by the third party (this condition usually prevents the agent’s own travelling and subsistence expenses, phone bills, postage, and other costs being treated as disbursements for VAT purposes)
- Your client was responsible for paying the third party (examples include estate duty and stamp duty payable by your client on a contract to be made by the client)
- Your client authorised you to make the payment on their behalf
- Your client knew that the goods or services you paid for would be provided by a third party
- Your outlay will be separately itemised when you invoice your client
- You recover only the exact amount which you paid to the third party
- The goods or services, which you paid for, are clearly additional to the supplies which you make to your client on your own account.
The HMRC argued in Brabners that the firm has provided advice based on the search and so had provided some value with the search, which would attract VAT, an argument that was upheld by the tribunal judge.
So, following this, it seems pretty simple. If it satisfies all of the above conditions and doesn’t form the basis of any advice, then it will be a disbursement and no VAT will be charged. Conversely, if the search does form the basis of advice, then it will be a recharge and VAT will be chargeable.
Whichever way you look at it, at DPS, we give you the option in our integrated Legal Accounting Software, Financial Director to add VAT to your disbursements or display disbursements without VAT.