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Friday 5th December 2008
Change in the Standard Rate of VAT from 1 December 2008
The recent change in the standard rate of VAT has caused some debate and confusion on the treatment that should be adopted. Set out below is a brief summary of our view of the VAT rules that mostly affect the work of Solicitors, Barristers, Law Costs Draftsmen and the like.
Tax Point
Basic VAT rules state that the VAT rate to charge on a supply of goods or services depends on when the supply takes place which is called the tax point.
The tax point is normally the earlier of:
1. Receiving payment,
2. Issuing a VAT invoice,
3. Supply of goods or services (actual supply of goods or completion of service) unless an invoice is raised within 14 days of this date when the invoice date takes precedence and becomes the tax point.
In his Pre-Budget Report on 24 November 2008 the Chancellor announced that the standard rate of VAT be reduced to 15% from 1 December 2008.
However with regard to services provided by Solicitors and Barristers it is not as simple as it sounds because there are differing tax point rules.
Solicitors
Solicitors need to determine whether a particular job is:
- A single supply of services; or
- A continuous supply of services
HMRC consider that the majority of supplies made by a Solicitor are single supplies, including work undertaken over an extended period of time, such as litigation, PI claims as well as more clearly defined one-off services, such as preparing a will.
However, there are some types of legal work which fall within the scope of the rules for continuous supplies of services. There is also a special rule relating to extension of tax points which has been centrally agreed with HMRC allowing a 3 month extension of the 14 day rule, the impact of which is explained below.
Before going into the detail it is worth restating that a payment for VAT purposes is when it is in the office account. Monies held in the client account are not considered to be payments for the purposes of determining a VAT tax point. This does not include legal aid monies which is outlined below.
Single Supplies of Services
Work completed before 18 November 2008
In the case of services which have been fully completed before 18 November 2008, the time of supply falls before the change in VAT rate and, as such, the work is subject to VAT at 17.5%, irrespective of when the invoice is issued. However, the work may be covered by the extension of the 14 day rule detailed below.
Work completed between 18 November 2008 and 30 November 2008
Services which have been fully completed between 18 November 2008 and 30 November 2008 will be subject to the new rate of 15% if invoiced after 1 December 2008 (17.5% if invoiced before 1 December 2008).
Work completed on or after 1 December 2008
Charged at the new rate of 15% even if the services have been carried out over a period of time which spans the change in rate.
Payments received on account
Payments received on account or in advance for services to be completed on or after 1 December 2008 can be treated as 15%. If a tax invoice has been issued previously at 17.5% in respect of the advance payment, a credit note will be required to adjust the VAT.
Invoices issued in advance
Tax invoices already issued at 17.5% for work which will not be completed until on or after 1 December 2008 can be recalculated at 15% but a credit note must be provided to adjust the VAT.
Extension of the 14 day rule
HMRC have agreed with the Law Society that, where Solicitors are unable to issue an invoice within 14 days after the date of completion of their services, the following general extension is available to all VAT registered Solicitors:
“If the consideration for a supply of services by a Solicitor is not ascertained or ascertainable at or before the time when the services are performed, the supply may be treated as taking place at the time when the Solicitor issues a VAT invoice in respect of it provided that the VAT invoice is issued not later than 3 months after the date of performance of the services.”
Failure to issue a VAT invoice within the 3 months would mean that the tax point reverted to the normal time of supply for Solicitors’ services.
Disbursements
Third party charges which form part of the overall charge for the Solicitor’s own services and on which input tax has been recovered by the Solicitor will follow the liability of the Solicitor’s supply.
So if you receive a VAT invoice for say Counsel’s fee on 1 November and recover VAT at 17.5%, when you pass it on as part of your charge after 1 December it will be subject to VAT at 15%.
Correctly applied 17.5% VAT charges from third party suppliers which meet the disbursements criteria can be passed on to the client gross even if included on a post-1 December 2008 invoice.
Legal Aid
If you receive Standard Monthly Payments (SMPs) from the Legal Services Commission for legal aid work, the VAT treatment under the agreed procedures depends on the extent to which each payment relates to completed cases. The special change of rate rules can be applied to SMPs that created tax points before the 1 December (that is where they were attributed to uncompleted cases or work that had not commenced) provided the cases to which they are eventually allocated will be completed on or after 1 December. Where this applies you can recalculate any VAT at 15%.
Continuous supplies of services
Where a firm provides continuous supplies of services (where services are supplied for any period where payment is made periodically or from time to time) the services are treated as supplied each time payment is received or a VAT invoice is raised.
For Solicitors, HMRC consider the following to be continuous supplies of services:
• Trustee services
• Retained legal adviser
• Acting as client’s legal office
There may be other examples which would need to considered on their individual merits.
• Where a firm invoices from 1 December 2008 VAT is charged at the new rate of 15%, provided that no payment has been received in advance. This includes WIP prior to 1 December 2008.
• Where payment has been received in advance, VAT is due at the old rate, 17.5%, if the work is completed before 1 December.
• Where work spans the rate change period an apportionment can be made, if payment has been received in advance, to reflect services provided after 1 December.
• If you issue VAT invoices covering periods up to 1 year ahead giving the amounts and dates when payments are due, the agreement will no longer be valid for payments due after the change. Replacement invoices must be issued. However if there is no such agreement the rules above apply.
Apportionment is only required where the supply is a continuous supply of services spanning the rate change and prepayment has been received. A choice can be made, it is not compulsory to do the apportionment. Clients who cannot recover VAT will expect this to happen.
VAT will be charged at 17.5% if it is a fixed price service and was completed before 18 November.
VAT will be charged at 17.5% if it is a service where no price has been agreed in advance and it was completed more than 3 months ago and is billed from 1 December.
These changes do not affect Solicitors who use the cash accounting scheme.
Barristers and Advocates
The special rules for Barristers and Advocates treat the VAT tax point as the earlier of:
1. the fee for the services being received
2. the issue of an actual VAT invoice
Most Barristers follow the arrangements under which fee notes do not become VAT invoices until they are receipted and hence the tax point is normally the date payment is received. Therefore fees received on or after 1 December will be liable to VAT at 15%. Fees received before 1 December will be liable to VAT at 17.5% but services that will not be completed until after 1 December can be recharged at 15% (issuing a credit note to adjust the VAT previously accounted for at 17.5%).
There is also another special rule that applies to Barristers on a change of VAT rate. This applies where a service is provided before the change of rate but under the special rules above the tax point falls after the change of rate (payment received / invoice issued). The Barrister may then elect for VAT to be applied at the original rate. Therefore a Barrister who receives a fee on or after 1 December for work completed before that date can choose whether to charge either 15% or 17.5%.
In practice this means that:
1. Where the fee is received before 1 December VAT will be charged at 17.5% unless the relevant work is ongoing after 1 December when the Barrister can elect to recharge at 15%
And
2. Where the fee is received on or after 1 December VAT will be charged at 15% unless the relevant work was completed before 1 December and the Barrister elects to charge at 17.5%.
As can be seen from the above the VAT rules allow for various different treatments with regard to which VAT rate to charge. It is possible that different firms of Solicitors and Barristers may choose different options.
CPR
Finally, CPR Costs Practice 5.7 – 5.8 also gives the following guidance to Solicitors:
Form of bill of costs where VAT rate changes
5.7
Where there is a change in the rate of VAT, suppliers of goods and services are entitled by ss.88 (1) and 88 (2) of the VAT Act 1994 in most circumstances to elect whether the new or the old rate of VAT should apply to a supply where the basic and actual tax points span a period during which there has been a change in VAT rates.
5.8
It will be assumed, unless a contrary indication is given in writing, that an election to take advantage of the provisions mentioned in paragraph 5.7 above and to charge VAT at the lower rate has been made. In any case in which an election to charge at the lower rate is not made, such a decision must be justified to the court assessing the costs.
Disclaimer
Consistent with our policy when giving comment and advice on non-specific issues, Kain Knight cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems it is recommended that professional advice be sought from your normal contact.
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