Law firms may face retrospective VAT bills, warns Saffery Champness

Law firms may face retrospective VAT bills, Saffery Champness has warned.

The caution from the Scottish accountancy firm follows the recent case of Brabners LLP and HMRC where the English law firm was ordered to pay £68,000 in VAT after tax authorities successfully argued that electronic property searches it procured from an agency should not have been treated as disbursements for VAT purposes.

The First-tier Tribunal ruled that the searches attracted VAT because Brabners then used the results as part of its advice to clients; the solicitors were not simply acting as a middle man to collect the search fee from the client.

VAT specialist Sean McGinness, based at Saffery Champness’ Edinburgh office, says that there is a risk that HMRC will look at other firms, who would do well to consider the consequences.

He said: “There is a risk that not only will HMRC be looking at future disbursements (both search fee and potentially other disbursement), but they may also look at invoices issued in the last four years where VAT has not been applied to disbursements. The VAT treatment, both historically and going forward will depend on the facts of the outlays and how they have been contracted for.”

Prior to searches becoming subject to VAT, they were treated as a VAT free disbursement, on the basis that the data was ultimately for the benefit of the end client.

However, HMRC argued that the law firms were not passing the data on as it was received, but were using it to advise clients, and therefore should have been recharged to the client with VAT as part of their services.

Mr McGinness added that law firms should review their disbursement treatment urgently: “Lawyers should review existing process and seek advice regarding how HMRC rules on disbursements will be applied.

“We expect that the law societies will issue new guidance in this area and will be liaising with HMRC. However, we would recommend that firms act now to understand whether they have a potential historic issue and/or whether a change in billing process is required.”

“The downside for consumers is that the existing process of VAT free outlays may change, making services more expensive for the end user.”