Connect Newsletter – October 2017

Should VAT apply to ‘Disbursements’?

A recent appeal in the VAT Tribunal between law firm Brabners LLP and HMRC could have a significant impact on how legal firms treat disbursements in the course of conveyancing.  The case concerned whether search fees could be treated as ‘disbursements’ and outside the scope of VAT or whether the search was part of the overall supply the legal firm made, and subject to VAT at 20%. The Tribunal ruled that VAT is due on the charge for electronic searches, which will inevitably mean higher fees to consumers.

This was because Brabners did not simply pass the searches onto the client but used the results in the course of its advice to clients.  It was clear that the law firm were not simply acting as a ‘middle man’ to collect the search fee from the client and so the conditions for treatment as a disbursement set out in HMRC’s guidance were not met.

Disbursements for legal firms

Whilst the decision is strictly binding only on the two parties, it is likely that HMRC will seek to apply the decision for other legal firms – and perhaps more widely.  It is also possible that Brabners could appeal to the Upper Tier Tribunal. The Law Society & Law Society of Scotland are understood to be considering the implications of the decision for their practice notes and guidance on VAT and disbursements.

Until such guidance is issued or HMRC make clear their policy, legal firms should consider the current treatment of charges for electronic search reports and review what is done with them (if anything) for the benefit of the client, to determine if this decision will impact.

It remains to be seen whether HMRC will take retrospective action more generally, but in the meantime, it looks like conveyancing search fees just got 20% more expensive.

VAT & Disbursements generally

There may be other situations where businesses incur costs on behalf of their clients and currently do not charge VAT by treating them as disbursements (e.g. architects and planning fees etc).  This decision brings into clear focus the need to examine and be clear on whether the service is used or consumed as part of your overall supply or simply passed through to the customer.  If you currently charge no VAT on disbursements, this decision should act as your call to review your position, to avoid falling foul of an HMRC challenge based on this case.

When is a prepayment not a prepayment?

The Court of Session has ruled in favour of online genealogy business Findmypast Limited against HMRC in a case that involved prepayments to download genealogy images using ‘Pay as You Go’ (‘PAYG’) credits.  They held that the prepayments under the PAYG scheme are not liable to VAT until redemption because at the time of receipt, there is no certainty on the nature of the supply to be made – or even if a supply will be made at all.

The Court considered three questions;

  1. What was the nature of the Supply & Consideration?

The Court found that it was the viewing and downloading of specific documents and images, rather than a mix of services including the free search function as HMRC contended (which would have meant the supply started on receipt of the PAYG payment).

  1. Was the payment received a ‘Prepayment’ for VAT (and VAT due at date of payment)?

The Court found that the payment was not a prepayment and consequently a tax point on payment was not created.  This was based on the uncertainty at the time of receipt – over whether a supply (of the nature outlined above) would evertake place (they gave weight to the level of unredeemed credits historically) but also the ‘price’ of each download and the exact nature of documents at the time of redemption.  The contract allowed Findmypast to reserve the right to change the information / data available.  It was held that the payment was in respect of something that was not yet clearly or precisely identified and these elements of uncertainty meant that the payment was not a prepayment for VAT purposes.

These two points taken together mean the payment is out-with the VAT net until redemption, but the Court went on to consider the third question;

  1. Does the credit represent a Face Value Voucher (‘FVV’)?

The Court considered that the credits did not meet all the conditions needed to confirm it was a FVV and therefore only be taxed on redemption.  They considered that there was insufficient link to a financial value that the consumer could quickly see (rather than ‘credits’), and held that the lack of transferability was inconsistent with general FVV principles and that the credits were purchased for a specific purpose rather than for its own sake.

This case is likely to have wider implications for other scenarios where prepayments or PAYG arrangements are in place and the exact nature of the prospective supply is not known or it is not clear that a supply will take place.

If you make supplies where payments are made and supplies are made at a later date, you should consider reviewing the arrangements to consider whether this decision has an impact.

Our experienced VAT team provided detailed advice and support to the client in this successful case as it progressed through to this third level of Court hearing and have provided similar support in other cases.  If you have any questions on this or any other case or dispute you may have with HMRC, please contact our VAT team to discuss.

Alan Davis – VAT Partner

Email: or tel: 07719 295827

New Government Tax Evasion Legislation

Two new criminal offences came into force on 30th September 2017 which makes all corporates, partnerships and LLPs liable for the criminal act of their employees and persons associated with them which lead to the facilitation of tax evasion in the UK and abroad. Prior to this new legislation board members and senior management had the defence of not being aware of the facilitation of tax evasion and were therefore not guilty of a crime.  From 30th September 2017, this is now no longer the case. If convicted a business could face unlimited fines.

The two new criminal offences are as follows: 1)The first applies to all businesses, wherever they are located in the world in respect of the facilitation of UK tax evasion. 2) The second offence applies to all businesses with a UK connection in respect of the facilitation of non-UK tax evasion.

It is essential that all affected businesses, board members and senior management protect themselves by taking steps to demonstrate that reasonable prevention procedures have been enacted. If you have any questions in relation to this topic or would like more advice, please email Peter Graham on