VAT on disbursements- An update5th October 2017 | Posted in: Professional Services, VAT
Many professional service firms are involved in recovering disbursements. Provided certain conditions are met, professional service businesses will not need to apply output VAT to a disbursement.
In a recent case (Brabners LLP v HMRC Commissioners) heard by the First-Tier Tribunal (Tax Chamber), HM Revenue and Customs (HMRC) won their argument to have output VAT applied to search fees charged by a third party agency. This has resulted in Brabners LLP, a legal practice, facing an unpaid VAT liability on search fees totalling around £68,000. This liability covers the period May 2012 to July 2015.
Costs incurred by a business in the course of supplying their services are not disbursements, therefore any “recharges” of these costs will attract output VAT. For example travel costs, such as an airline ticket to meet a client would be subject to output VAT.
It is vital that the client is the recipient of the supply in order for the costs to be treated as a disbursement and avoid any output VAT charge. It was deemed by the tribunal, that property searches form part of the overall services provided by a solicitor in the course of carrying out their work, consequently, they should be subject to VAT.
The decision in the Brabners case is likely to lead to HMRC reviewing the treatment of disbursements in the future. In addition, HMRC is likely to look at the past four years to ensure that VAT has been correctly applied to fees issued. It is not known whether Brabners LLP will appeal the decision.
There is an expectation that the Law Societies will offer updated guidance in the area of disbursements for solicitors.
Going forward, legal practices, in particular, need to review their treatment of disbursements for VAT purposes.
If you would like to discuss this or if you are looking for support and advice on VAT matters, please do not hesitate to contact us.