I previously tried to give a simple summary of the impact of the recent VAT change in an earlier post.
However, a regular reader of the Legal Costs Blog recently got in touch asking me to mention this issue again. As my patience is slowly disappearing over the number of defective bills of costs I keep seeing, I will oblige.
CPD 4.2(4) reads:
“Where value added tax (VAT) is claimed and there was a change in the rate of VAT during the course of the proceedings, the bill must be divided into separate parts so as to distinguish between;
(a) costs claimed at the old rate of VAT; and
(b) costs claimed at the new rate of VAT.”
CPD 5.9 mirrors this:
“All bills of costs, fees and disbursements on which VAT is included must be divided into separate parts so as to show work done before, on and after the date or dates from which any change in the rate of VAT takes effect.”
You will note these are mandatory requirements. If you prepare your bill in one part, where the work covers a change in VAT rate, the bill is defective.
The CPD deals with what rate should be claimed in more detail:
“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.”
This means that if a receiving party can take advantage of the lower rate then that is what they should do.
The Law Society has issued a detailed Practice Note on the VAT change (see link). I will repeat one of the examples they give in full:
“Example:
You have been instructed by your client to undertake court proceedings to recover damages for clinical negligence. Instructions were received and your retainer commenced in early September 2006. The case is settled in December 2009 on the basis that the opposing party pay your client’s costs and a bill of costs is drawn up. The amount of the costs are not agreed or assessed until March 2010. How do you calculate the VAT?
Under the normal VAT rules, where one party is ordered to or has agreed under a settlement to pay the other’s costs, the settling of the costs in these circumstances is part and parcel of your overall supply to your client. In such circumstances, the basic tax point arises when the costs have been agreed between the solicitors or the assessment of costs procedure is complete and the costs will be liable to VAT at 17.5 per cent. Under the special rules, provided that that no interim invoices have been raised or payments received over the entire course of the supply, which would be the case if there was a conditional fee agreement, then you should apportion your costs so that:
• 17.5 per cent VAT is charged in relation to your costs for the period being due from September 2006 to 30 November 2008
• 15 per cent is charged for the period from 1 December 2008 to 31 December 2009, and
• 17.5 per cent is charged for the period from 1 January 2010 to March 2010.
If you have issued interim invoices to your client during the course of the supply, then the rate you charge to the other party will be the same as that on the invoices you have issued.”
Based on this advice, unless interim invoices have been raised (which would be highly unlikely with a claimant’s case funded by way of a CFA) you are not meant to claim VAT at 17.5% throughout. Please stop.
13 thoughts on “VAT – Again”
On a related VAT issue; we are noticing from one particular Defendant insurer a refusal to pay VAT (at whatever rate!) upon the medical evidence obtained (usually via an agency) as to the actual medical expert element (seeking evidence that the practitioner is VAT registered). We have guidance from HMRC that VAT should be charged on the whole amount (i.e. if the expert charges £50 and the agency cahrge £30 VAT is payable upon the full £80 regardless of the expert’s VAT position).
Said insurer state they are awaiting a court decision upon the same without specifying what case it is, does anyone have any information upon this?
Your interpretation of cost practice direction 5.7 is incorrect.
It specifically states that where the basic and actual tax points span a VAT change you can elect to apply the lower VAT rate.
You will be aware that the basic tax point is when the retainer ends and the actual tax point is the point of invoice.
If the work was started in 2009 and completed in 2010 and then later invoiced in 2010 the tax points do not span the VAT change.
Not according to the Law Society Practice Note. This reads:
“Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 01 January 2010 will be liable to the 17.5 per cent rate. However, there are optional change of rate rules that you may wish to apply:
* Where you issue a VAT invoice or receive a payment on or after 01 January 2010 for work that was completed before 01 January 2010 you may account for VAT at 15 per cent.
* Where work commenced before 01 January 2010 but will not be completed until on or after 01 January you can apportion the supply between that liable to 15 per cent and that liable to 17.5 per cent.”
Is it not still a grey area though until we have a case that gives us chapter and verse on the subject? The word “may” in the practice note is open to interpretation?? Why would service be defective?
CPD 5.9 provides a mandatory requirement that a bill is split between the periods of different VAT rates being in place. This appears to be so regardless of what rate is being claimed. A bill that fails to show this split is, in my view, defective.
Thanks for your response; to be honest I, like you, feel that Bills should be split as per your blog post above, but i would be more confident in the position if there was a case to make things clearer so as to remove the temptation to simply claim the higher amount and let the paying party raise the point.
It’s interesting to note that this has only become an issue for defendants since the VAT rate has reverted to 17.5%!!!!!!!!
Nothing at all was heard about breaches of the CPD / defective bills etc whilst claims for costs were being presented to paying parties with VAT claimed at 15% throughout even when the work done covered pre and post 01.12.09!!!!!!!
Strange that!!!!
(1) As the CPD states, the solicitor can elect whether to charge differential rates, or just 17.5% throughout.
(2) If the solicitor elects to pay the higher rate throughout, then the client is liable to pay that rate.
(3) Since inter partes assessment is concerned with whether THE CLIENT is reasonably claiming costs, not with whether his solicitor has acted reasonably, CPD 5.8 is problematic. The client cannot act unreasonably in claiming the higher rate throughout if this, as a result of his solicitor’s (entirely lawful) election is what he is obliged to pay.
(4) Where, because of a solicitor’s election, the rate of VAT claimed is uniform throughout, I do not believe the court will interpret CPD 5.9 as requiring the bill to be split to reflect the periods where the rate would have been different if the election had been different.
(5) Re VAT on medics: in 2005, the European Court of Justice ruled that the VAT exception for doctors applied only to fees for treatment, not for medico-legal work. HMRC allowed doctors a transitionary period, but now VAT must be charged on medical reports if the practioner’s volume of medico-legal business causes him to be registered. So, if the practitioner is VAT registered, VAT is payable. Equally, if the supply is made by a VAT registered agency, then VAT is payable on the whole fee not just the agency’s charge regardless of the medic’s VAT status. As the contract is between the solicitor (as agent of his client) on the one part and the agency on the other, and the whole supply is taxable in the light of the ruling of the ECJ.
in response to Anonymous of 25th May (2 above) the reason no challenge was raised when the vat rate changed to 15% on 01.12.08, was because the Law Society and HMRC Guidance was that vat applied throughout @ 15%. it has only been with the reversion to the rate of 17.5% that the alternate provisions mentioned by Simon have come into play. It is also only with the recent amendments to the CPR that the new practice directions have appeared specifically to cover the point
Strange you didnt know that! 🙂
It isd a question of reasonableness. Most solicitors dont bother to check what rate they claim, so they arent making any election at all. Ignorance is no excuse. I have had one case where a solicitor maintained he was paying 17.5% throughout, and the DJ said that may be the case but it was not reasonable so he limited the defendants liability to 15%, adding he hoped as an officer of the Court the solicitor would now pay the Revnue the balance as was his declaration to the Court
On the Medical Vat point, there is a decision, it does rule that vat is not recoverable, and it is in the process of being reported
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“On the Medical Vat point, there is a decision, it does rule that vat is not recoverable, and it is in the process of being reported”
Any further detail upon this?
Are we over complicating the matter here? VAT is payable to HM Revenue and Customs not the Law Society or the Ministry of Justice.
Contrary to what ‘Anonymous’ writes on 25th April, CPD 5.7 does not refer to the ‘lower’ rate.
Regardless of what CPD 5.7 says surely s88 1994 VAT act has the final word?
HMRC’s guidance
1. VATTOS8520 – Tax points for specific categories of supplier: solicitors: basic tax point
The majority of supplies by a solicitor are single supplies, albeit the supply may involve work undertaken over an extended period of time. A good example of this is litigation. The basic tax point occurs when the services have been fully completed.
But it can be difficult sometimes to establish precisely when this might be, especially where the matter has taken a number of years to be resolved. In these circumstances you will have to be guided by solicitors themselves subject, that is, to what is claimed being reasonable.
Some solicitors make supplies on a regular basis to an individual client. In most cases this will represent a series of separate supplies, each of which will be subject to its own basic tax point. Where it is the solicitor’s practice to bill the client periodically for all work performed or completed during the period, it is important to ensure that the basic tax point rules are complied with for each of the separate supplies. Only in exceptional circumstances, such as where a solicitor is retained and remunerated as a permanent legal adviser or to act as the client’s legal office, might this kind of relationship represent a continuous supply of services. But there are some types of legal work that are inherently continuous in nature. An example being the supply of the services of a solicitor acting as a trustee. These supplies normally fall within the scope of the time of supply rules that apply to continuous supplies
2. VATTOS8540 – Tax points for specific categories of supplier: solicitors: adjustments to fees
Introduction
In certain circumstances a solicitor’s fees can be subject to third party scrutiny and adjustment before acceptance. The circumstances in which this can occur and the tax point consequences depend on the type of work involved.
Contentious work (non-Legal Aid)
The losing party to the legal action may be ordered to pay costs. Where this is the case, the solicitor for the successful party prepares a bill which is then either agreed with the solicitor for the loser, or is referred to the Court for scrutiny under the taxation procedures. Settling of the costs in these circumstances is part and parcel of the solicitor’s overall supply to the client. A basic tax point does not therefore occur until either the costs have been agreed between the solicitors or the taxation procedure is complete.
Solicitors – The Law Society
The procedure for drawing up solicitor’s bills is such that most solicitors are unable to issue an invoice within 14 days after the date of completion of their services. The following general extension has therefore been granted 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.
Section 88(1)-(3), (6) and (8) sets out the special rules that can be adopted for supplies that take place around the time of a change in VAT rate or liability. Suppliers may opt to use the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise be applicable under the normal tax point rules. But this only applies to the rate of VAT. For all other purposes the normal tax point rules continue to apply. So, for example, in the case of a supply where the tax point would normally be the issue of an invoice 10 days after the basic tax point, this continues to be the time at which the VAT must be accounted for. But if, in the meantime, there has been a change in VAT rate or liability, the supplier may choose to invoice the supply at the VAT rate applicable at the time of the basic tax point.
There are some limitations and, under 88(6), this facility cannot be adopted for supplies subject to self-billing arrangements or where the supply involves goods disposed of by a third party in satisfaction of a debt. Further details about disposals of goods in satisfaction of debts can be found in manual covering supply and consideration.
Section 88(3) brings supplies that are subject to the time of supply regulations potentially within the scope of these change of rate arrangements. This is activated by regulation 95 of the VAT Regulations 1995 (see VATTOS2390). Section 88(8) defines ‘reduced rate’ for the purposes of the section. For further information see VATTOS7200.
VATTOS2280 – Legislation: UK primary law (VAT Act 1994): Section 88 Supplies spanning change of rate, etc
Law
88(1) This section applies where there is a change in the rate of VAT in force under section 2 or 29A or in the descriptions of exempt, zero-rated or reduced-rate supplies or exempt, zero-rated or reduced-rate acquisitions.
(2) Where –
(a) a supply affected by the change would, apart from section 6(4), (5), (6) or (10), be treated under section 6(2) or (3) as made wholly or partly at a time when it would not have been affected by the change; or
(b) a supply not so affected would apart from section 6(4), (5), (6) or (10) be treated under section 6(2) or (3) as made wholly or partly at a time when it would have been so affected,
the rate at which VAT is chargeable on the supply, or any question whether it is zero-rated or exempt or a reduced-rate supply, shall if the person making it so elects be determined without regard to section 6(4), (5), (6) or (10).
(3) Any power to make regulations under this Act with respect to the time when a supply is to be treated as taking place shall include power to provide for this section to apply as if the references in subsection (2) above to section 6(4), (5), (6) or (10) included references to specified provisions of the regulations.
(4)
(5)
(6) No election may be made under this section in respect of a supply to which paragraph 7 of Schedule 4 or paragraph 2B(4) of Schedule 11 applies.
(7)
(8) References in this section –
(a) to a supply being a reduced rate supply, or
(b)
are references to a supply …… being one on which VAT is charged at the rate in force under section 29A.
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Commentary
Section 88(1)-(3), (6) and (8) sets out the special rules that can be adopted for supplies that take place around the time of a change in VAT rate or liability. Suppliers may opt to use the rate of VAT in force at the time of the basic tax point where this is different from the rate that would otherwise be applicable under the normal tax point rules. But this only applies to the rate of VAT. For all other purposes the normal tax point rules continue to apply. So, for example, in the case of a supply where the tax point would normally be the issue of an invoice 10 days after the basic tax point, this continues to be the time at which the VAT must be accounted for. But if, in the meantime, there has been a change in VAT rate or liability, the supplier may choose to invoice the supply at the VAT rate applicable at the time of the basic tax point.
There are some limitations and, under 88(6), this facility cannot be adopted for supplies subject to self-billing arrangements or where the supply involves goods disposed of by a third party in satisfaction of a debt. Further details about disposals of goods in satisfaction of debts can be found in manual covering supply and consideration.
Section 88(3) brings supplies that are subject to the time of supply regulations potentially within the scope of these change of rate arrangements. This is activated by regulation 95 of the VAT Regulations 1995 (see VATTOS2390). Section 88(8) defines ‘reduced rate’ for the purposes of the section. For further information see VATTOS7200.