When acting for a potential buyer in respect of a property purchase, it is normal for a solicitor to engage with a third party to conduct searches. These will determine whether any restrictions apply over the property, and provide other relevant information of interest to the buyer.
Local councils are often instructed to carry out these searches, and in the past there has been no requirement for them to add VAT to their fees. This situation is in contrast to private organisations, who have always been obliged charge VAT when carrying out certain searches.
HM Revenue & Customs (HMRC) have now taken the view that local councils must charge VAT on searches carried out using the Law Society’s CON29 and CON290 forms. For most councils, this change of policy took place on 1 January 2017. A number of councils have been given additional time by HMRC to implement the change, however, all councils must be compliant by 31 March 2017. On a positive note, the LLC1 Official Certificate of Search is not affected by the change, and these can continue to be provided free of VAT.
Search fees are normally passed on to the potential buyer by way of a disbursement on the solicitor’s invoice. Where the cost is disbursed, the VAT now charged by the council must be included in the disbursement, and cannot be recovered by the solicitor. In certain circumstances, the VAT incurred can be recovered by the buyer, however, in most cases, the addition of VAT will result in an increase to the buyer in the cost of purchasing a property.
HMRC have yet to release a formal update to their guidance, however, it is thought that the changes have been brought in to prevent unfair competition between local authorities and private organisations offering searches.
If you have any queries in respect of this change, please contact the Larking Gowen VAT team on 01603 624181, or email email@example.com.