A recent First-Tier Tribunal (FTT) decision in relation to VAT could have wider implications for law firms that use third-party firms to carry out electronic local authority property searches, it has been warned.
In a recent case, the FTT found that VAT is payable on any property searches conducted by third-party firms, and that such searches should not be treated as disbursements.
The ruling saw the firm involved ordered to pay £68,000 in backdated VAT, after the FTT agreed that the searches were used as part of its advice to clients – rather than simply acting as a middle man to collect the search fee.
According to reports, the law firm in question was using the search provider Searchflow between May 2012 and June 2015.
The case saw HM Revenue & Customs (HMRC) successfully argue that such third-party searches “constitute consideration obtained, in return for the supply, from their client, and which forms part of the charges for their services.”
It added: “HMRC contends that the information within the search results is used by [the law firm] to give advice to their clients, and hence recovery of the outlay represents part of the overall value of the solicitor’s supply to their client.
The tax authority told the FTT that VAT would not be payable by either the search company or the solicitor if they passed it on “without analysis or comment.”
Judge McNall, presiding over the case, said: “The appellants are not simply a conduit or post-box for search results.
“Simple common sense dictates that clients engage the appellant in transactional work since the appellant knows what it is doing, knows what a search is, knows what searches to obtain, knows how to get them quickly and conveniently, and knows what to do with them when it gets them.”
He added: “In my view, this reasoning can be extended so that silence from the appellant as to the searches which it had done and their results would be taken by most clients as an ‘all-clear’.”
The judgment may have significant implications for any law firms who use a search provider or have used a search provider in the past.
Commenting on the ruling, a spokesperson on behalf of the Law Society said: “We are considering the implications of this decision for our practice note on VAT and disbursements.”