The defendant costs specialists

VAT Skeleton Argument

By on Mar 8, 2016 | 9 comments

The last increase in the VAT rate occurred on 4 January 2011. It is therefore surprising, to say the least, that some receiving parties appear to be still ignorant of the rules relating to work undertaken when the VAT rate was lower (15% or 17.5%). (Of course, it is perfectly possible that this is simply a wheeze to try to recover VAT at a higher rate and then pocket the difference between that actually charged.)

In any event, I have updated my VAT Skeleton Argument and the links to the relevant documents on Legal Costs Central.

    9 Comments

  1. We take the opposite approach. My firm has its Bills drawn correctly, showing VAT at the correct rate throughout – and then when we receive payment we pay 20% VAT on all the profit costs, apparently because it is too much work to do it properly. No wonder we’ve had so many redundancies.

    Anonymous for obvious reasons

    8th March 2016

  2. I completely agree with the post @ 09:28 and my firm also takes the same approach. How on earth do you apportion VAT on a £50K settlement for costs that has spanned 8 years!

    King of Costs

    8th March 2016

  3. so Simon, do you then also compartmentalise your offers per each VAT period, so the RP knows how much he is liable to HMRC for accurately? Or do you make a “global” offer and leave it to chance and intended confusion (and possible later HMRC action as the RP Sols concerned cannot show what was offered for VAT in each period)?

    Funnily enough, there was a similar VAT “skeleton” promoted by a chap up in a “northern powerhouse” firm, which prompted 2 RCJ’s to comment what a complete waste of Court time and parties resources it was in all practical senses. They disregarded global offers when awarding RP costs too

    Anonymous

    8th March 2016

  4. Anonymous @ 4:26pm – You appear to be confusing the issue of what costs are recoverable on an inter partes basis with the issue of what costs a RP has incurred. Although a “Paying Party”, as the name implies, pays money to the RP, they do not directly “pay” the RP’s costs. It is no more than a contribution towards the RP’s costs (even if the figure is sometimes accepted by the solicitor as being sufficient to cover all costs). A PP makes an offer as to what they consider reasonable on an inter partes basis. Particularly with the growing importance of proportionality post-Jackson, that figure may be quite different to the costs actually incurred by the RP or what might be payable on a solicitor/own client basis. The latter is of no concern to a PP. If a PP offers £50k on a global basis, and that is accepted, that has nothing to do with what invoice might be raised as against the RP by his solicitors or how any VAT should be apportioned. It is of no concern to HMRC how the £50k is made up. In due course, the solicitor raises an invoice to his client (the PP) and apportions the VAT as appropriate.

    Simon Gibbs

    8th March 2016

  5. King of costs : Why wouldn’t you be loading the apportionment to the lowest rate periods first?

    Robert Pettitt

    9th March 2016

  6. @Simon 6:40pm
    I see no confusion – the basis of SO/C costs differing from “between the party” costs is fundamentally understood by all in costs (well, perhaps not all, which is often the problem….)
    Indeed, your own example shows good reason why NOT to apportion a bill. If a RP serves a bill claiming 20% VAT throughout, you throw in your Skeleton VAT and a £50k “global” which is accepted, RP Sol accounts for VAT at 20% to HMRC, no problem at all with HMRC. If however he splits his bill for VAT, either up front or by amendment, and THEN accepts a £50 global offer because you refuse to break it down per your own argument, he has to show HMRC how it is apportioned – sorry, your comment “its is of no concern” to HMRC as to how it is made up, is very wrong in practise.

    Anonymous

    9th March 2016

  7. Anon @ 9:20am

    This is incorrect advice.

    I looked at this issue in 2010 when the VAT rate first went back up to 17.5% and I spoke to the HMRC to corroborate my understanding of the issue.

    If you have worked for a client over the 3 VAT periods and they have incurred £2k per year of fees the bill of costs to the opponent will be:

    £2k + 15% VAT
    £2k + 17.5% VAT
    £2k + 20% VAT

    It may be that the solicitor has agreed that he will settle for the sum recovered from the opponent with no shortfall contribution from the client.

    The opponent may make an offer with no breakdown, say £2400 inclusive of VAT. This sum is accepted and the client now theoretically has £2400 in his pocket to pay you.

    You receive the £2400 into your client account and you now have to decide how to allocate the money.

    You can do this in a number of ways:

    (1) You could be very cautious and allocate it all at 20% VAT rate; so you get £2000, you pay £400 VAT

    (2) You could split the £2400 evenly over the VAT periods (broadly but not quite £666 per VAT period as needs adjusting for each VAT differential)

    (3) You could bill £2000 at 15% VAT which would leave you with £100 (inclusive of VAT) to bill at £17.5%

    HMRC do not care which of these you do as long as you can show your workings.

    The amount that the claimant has recovered inter partes and the purported apportionment of such recovered sums is irrelevant to HMRC.

    What HMRC cares about is that if one continuous piece of work was done over a long period of time you have not lied about when the work was done in order to swindle them out of VAT. So for example, if you charge a flat fixed fee to your client (e.g. conveyancing) you will have to apportion the fee between the VAT periods.

    If on the other hand you work on an hourly rate with a shortfall in recovery there is no issue at all with saying that your fees are £2000 for VAT period 15%, £2000 for VAT period 17.5%; and £2000 for VAT period 20% and because you are only paying me £2000 I will allocate that all to the lowest VAT periods first and I am writing off the balance.

    It makes no financial sense to allocate any fee income to a rate higher than required.

    If £1,000,000 was paid in VAT at 20% rather than 15% that’s an overpayment of £750,000 equating to approximately £625,000 lost billing.

    Robert Pettitt

    10th March 2016

  8. Whoops. Calculations at end should read £250k overpayment equating to approx £205k lost billing.

    Robert Pettitt

    10th March 2016

  9. @ RP

    which is why, in relation to Simon’s original post, it makes no difference at all to the PP what the VAT claim is at, particularly where he makes a global offer

    Anonymous

    11th March 2016

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