Brabners LLP v Commissioners of HM Revenue and Customs

Value added tax – Conveyancing – Searches – Appellant solicitors obtaining online property searches from external search agency – Agency invoicing appellant for cost of search without adding VAT – Appellant treating cost as disbursement and invoicing clients for same amount without VAT – Respondent commissioners assessing appellant as liable to VAT on search fees – Appellant appealing – Whether charges made for searches to be excluded from taxable amount as disbursement – Whether VAT to be applied by the appellant – Appeal dismissed The appellant was a law firm with a real estate department. It offered conveyancing services, both to buyers and sellers, in relation to property transactions, in relation both to commercial and residential property. The appellant often obtained local authority and local land charge searches: namely, information appertaining to the property held by the relevant local authority in its files and registers concerning matters including planning, environmental health and building control. Electronic searches were done through a third-party search agency which would invoice the appellant for the cost of the search without the addition of VAT. The appellant treated the fee as a disbursement and invoiced its client accordingly. The appellant mainly carried out a review of the search contents and provided the client with a separate report setting out its legal advice on the search results. The respondent commissioners assessed the appellant as liable to VAT on the search fees charged to it by the search agency. They considered that the search fees should not be treated as a disbursement since they were not simply repayment of expenditure incurred in the name and on behalf of the customer under article 79 of Council Directive 2006/112/EC (on the common system of VAT) but constituted consideration obtained, in return for the supply, from their client, and which formed part of the charges for the appellant’s services under article 73 of the Directive. The information in the search results was used by the appellant to give advice to clients and recovery of the outlay represented part of the overall value of the solicitor’s supply to their client. The appellant appealed, contending that the respondents had not applied articles 73 and 79 correctly in relation to the specific facts of the disputed search fees and that the appellant was entitled to treat those charges as excluded from the taxable amount. Held: The appeal was dismissed. (1) In general, VAT law drew a clear distinction in principle between cases when the relevant expenses paid to a third party (C) had been incurred by A in the course of making its own supply of services to B and as part of the whole of the services rendered by it to B; and where specific services had been supplied by C to B (and not to A) and A had merely acted as B’s known and authorised representative in paying C. It was only in the second case that the amount of the payments to C could qualify for treatment as disbursements for VAT purposes. The present case fell into the first category. Where the goods or services purchased were supplied to the solicitor to enable him effectively to perform the service supplied to his client, in whatever form the solicitor recovered such expenditure from his client, whether as a separately itemised expense, or as part of an inclusive overall fee, VAT was payable because the payment was part of the overall consideration which the client paid for the service supplied by the solicitor. That test applied in ascertaining whether a particular payment was a disbursement or not. The appellant’s characterisation of whether something was a disbursement was not determinative of its true juridical status: De Danske Bilimportører v Skatteministeriet (Case C-98/05) [2006] ECR I-4945 applied. Rowe & Maw (a firm) v Customs and Excise Commissioners [1975] 1 WLR 1291 followed. Nell Gwynn House Maintenance Fund Trustees v Customs and Excise Commissioners [1999] STC 79 considered (2) In the present case, the expenses paid to the third party had been incurred by the appellant in the course of making its own supply of services to its client and as part of the whole of the services rendered by it to its client. The appellant was supplying conveyancing services. It owed its clients a duty to take reasonable care and skill. It routinely made property searches. The client was asking the appellants, as solicitors, to ensure that the transaction could safely go ahead; and was expecting the appellants, as solicitors, to identify any risks or other factors adversely affecting the property. The client expected the appellant to do all that was necessary for the transaction, unless it was told expressly otherwise, which included making all relevant searches and inquiries, and to draw anything relevant in them to the client’s attention. Much of the expertise of a solicitor lay in identifying any problem. The appellants were not simply a conduit or post-box for search results. Common sense dictated that clients engaged the appellant in transactional work since the appellant knew what it was doing, what a search was, what searches to obtain, how to get them quickly and conveniently, and what to do with them when it got them. When the appellant obtained search results, and prepared a separate report, it was using that information as part and parcel of its overall service. When that had happened, the search fees should not have been treated as disbursements and VAT should have been charged. The payment was part of the overall consideration which the client paid for the service supplied by the solicitor. The same applied where the appellant did not prepare a separate report on the searches. Otherwise, the VAT treatment came to depend on whether the solicitors happened to send the original searches or a copy to the client or not. That was arbitrary and it could not be determinative. Mark Whiteside (Solicitor) appeared for the appellant; Joanna Vicary (instructed by the General Counsel and Solicitor to HM Revenue and Customs) appeared for the respondents. Eileen O’Grady, barrister Click here to read transcript: Brabners LLP v Commissioners of HM Revenue and Customs