VAT tribunal highlights disbursements threat

Property conveyancing
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A VAT problem might be lurking for businesses that pass on to clients the cost of obtaining reports to do their work such as search fees but add VAT to those fees.

Many of us have bought a property and received a bill from our solicitor detailing a wide range of costs: search fees, land registry fees, Stamp Duty Land Tax, and telegraphic transfer fees.

In most of these situations, the solicitor will treat the costs as a disbursement and not charge VAT. In other words, the expenses in question belong to the house buyer and not the solicitor so he has passed on the expense at cost price and not charged VAT.

However, if the solicitor recovers the cost of his own expenses, such as telephone, fax and photocopying charges, then he should add VAT at 20%, the expense effectively becoming part of his standard rated fee. For a genuine disbursement to be recharged without VAT it has to meet all of the conditions in HMRC’s guidance – see VAT Notice 700, para 25.1.

Tribunal case

The first-tier tribunal case of Brabners LLP (TC 6093) ruled that the charge by a conveyancing solicitor to a client for an electronic property search was not a disbursement, even if the solicitor passed on the report to the house buyer without making any comment or giving any advice.

The conclusion of this case means that the fee paid to the local authority is an expense relevant to the solicitor, enabling him to carry out his work for the client who is buying the property, and thus VAT should be added to the fee.

HMRC's approach

Somewhat strangely, HMRC has recently indicated to the Law Society that it will continue to accept for the present time that the cost of a paper search can always be treated as a disbursement, but not the cost of an electronic search, if the latter is used by the solicitor to advise the client or produce a report (as will usually be the case).

This reminds me of the other dilemmas we have in the VAT world where digital formats get a rough deal – for example, a kindle book is standard-rated but a paper book is zero-rated.

It seems that the paper search being eligible for disbursement treatment is a historic concession rather than a decision based on a legal analysis of either UK or EU law, which was first agreed with the Law Society on 1 October 1991.

HMRC guidance

If you have any disbursement dilemmas, a useful starting point is HMRC’s manual VTAXPER47000, which deals with disbursements in particular areas and trades, including the search fee issue considered in this article.

A useful section for many advisers acting for garages deals with the rules for MoT testing fees. This deals with the pitfall that I have come across many times in recent years where a garage subcontracts a test to another garage and then applies a mark-up on the charge to the final customer. The mark-up means it is no longer a disbursement and 20% VAT is due on the full fee.


I recall an FTT case about a second-hand car dealer who sold a car to a customer for an agreed price, say £10,000, but then itemised the MoT fee for the vehicle separately on his sales invoice: £9,950 for the car and £50 for the test. He didn’t include this £50 fee in his second-hand margin scheme for output tax purposes, he treated it as a disbursement (Richard L Finney TC04667).

HMRC won the case (in my opinion correctly, although the HMRC officer got some of the maths wrong so the appeal was partly successful), on the basis that Finney had supplied customers with a car that included an MoT certificate rather than a car plus an MoT certificate, ie a single supply of the car for £10,000.

As a final message, if you have clients who treat some of their income as disbursements and don’t charge VAT, it might be a good time to check that they are getting things right.

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.


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13th Jun 2018 08:56

It's beyond ridiculous that an electronic book is standard rated yet a paper book is zero rated. There's no valid reason for this other than HMRC discriminating against digital technology. Maybe they're running scared of an industry that is too articulate to fight against but until we have a tax regime without all these idiotic anomalies then our tax system will continue to be abused by those that seek financial gain.

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to rememberscarborough
13th Jun 2018 09:38

The concession to zero rate paper books is because they are used in education. When the schools start issuing e-readers to pupils then there may be an argument to zero rate e-books. As far as I know this hasn't yet occurred.

Ever the pessimist though, I suspect that if the government were to regularise the situation, it's far more likely they'll start charging VAT on paper books rather than cease charging it on e-books.

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13th Jun 2018 11:36

Title may be inaccurate: "A VAT problem might be lurking for businesses that pass on to clients the cost of obtaining reports to do their work such as search fees but add VAT to those fees."
Should it not say "but do not add VAT to those fees"?

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13th Jun 2018 16:51

What about annual return costs invoiced to clients?

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