Law firm loses VAT case after “misinterpreting” tax legislation

A solicitors’ firm has been ordered to pay almost £68,000 in VAT after a judge ruled that it had “misinterpreted” the rules around the tax treatment of disbursements.

The landmark ruling follows the case of Brabners LLP and HM Revenue & Customs (HMRC).

According to reports first published in September 2017, law firm Brabners LLP had been ordered to pay £68,000 in unpaid VAT for electronic local authority property searches it procured from an agency.

While the firm claimed that its conveyancers simply collected the electronic search fee from the client and paid it forward to the local authority, HMRC argued that the firm used the results as part of its advice to clients, therefore attracting VAT.

Handing down the ruling, the Tribunal judge said the electronic property searches in question were “supplied to the law firm which used them as part and parcel of its own overall supply of legal services to the client”, meaning these those costs “could not be treated as disbursements for VAT purposes”.

Following the ruling, the Law Society for England and Wales have now published new guidance, addressing the difficulties interpreting VAT legislation and to determine how it should be applied in transactions.

“We are aware of the difficulties this has caused many firms. Firms may have taken a variety of positions for entirely honest and justifiable reasons. Many firms will want to take a conservative approach to classifying items as disbursements going forward, and in many cases we think that is likely to be a sensible approach,” said the regulator.

It added that the guidance “might not be able to answer all the legitimate questions practitioners may have”, but it aims to “set the context for the decisions that law firms must take on how they treat disbursements”.

For help and advice regarding accounting for VAT, get in touch with our expert legal finance team.