A recent First Tier Tax Tribunal (FTT) decision has highlighted a risk in relation to the VAT treatment of disbursements.
“HMRC guidance states that to treat a payment as a disbursement all of the following must apply:
- you paid the supplier on your customer’s behalf and acted as the agent of your customer
- your customer received, used or had the benefit of the goods or services you paid for on their behalf
- it was your customer’s responsibility to pay for the goods or services, not yours
- you had permission from your customer to make the payment
- your customer knew that the goods or services were from another supplier, not from you
- you show the costs separately on your invoice
- you pass on the exact amount of each cost to your customer when you invoice them
- the goods and services you paid for are in addition to the cost of your own services”
Traditionally, for professional services firms such as solicitors this has meant that expenses such as printing, postage, travel etc are incorporated into the fee charged to clients and VAT is added to this cost, whereas the recharge of expenses such as local authority searches are itemised separately and VAT is not added to the cost.
The recent case was concerned with charges made by a conveyancing firm, Brabners LLP, which offered conveyancing services and often obtained local authority and local land charge ‘searches’ on behalf of its clients. The majority of the searches were carried out by a specialist online search agency, Searchflow. Brabners treated the fees paid to Searchflow as disbursements and invoiced its clients without VAT. HMRC assessed Brabners for £67,776 together with interest, contending that these fees formed part of the charges for Brabners’ services as the information within the search results was used by Brabners to give advice to its clients. The Tribunal agreed with HMRC and dismissed the appeal, this was regardless of whether or not Brabners prepared a separate report on the search results.
Although FTT cases are not binding on anyone other than the parties involved, the outcome of this case is a concern and solicitors and other professional service firms who pass through VAT free disbursements should take note. If there is doubt as to the VAT treatment of disbursements further advice should be sought.