Legal Cost Specialists

VAT on legal costs

I stumbled across another law costs drafting firm’s blog the other day (they’re all at it now) which said:

“VAT is an elective decision and thus again should you wish to charge VAT at 20% throughout on matters where a CFA has been used the decision is practice by practice and not determined by years where the VAT was actually at a different rate.”

I beg to differ. It is extremely rare in CFA cases that the solicitor has any right to election. This is because of something called the indemnity principle. What do the terms of the CFA allow the solicitor to charge the client in respect of VAT? If the solicitor has a CFA that incorporates the standard Law Society wording the following clause will apply:

“We add VAT, at the rate (now [………]%) that applies when the work is done, to the total of the basic charges and success fee.”

The solicitor is contractually limited as to what they can charge (the rate in force when the work was done). Not that the indemnity principle stops certain law costs draftsmen claiming whatever they think they can get away with…


9 thoughts on “VAT on legal costs”

  1. I would say you are both right.

    The original blogger is right in so far as what is chargeable to the client – it is optional to apply a lower rate in accordance with the HMRC guidance.That said, it is questionable whether it is a good practice. However, in a between the parties assessment, you have to apportion as the court is likely to find it unreasonable to expect the paying party to pay 20% throughout.

  2. There can’t be discretion as to what to charge the client where the retainer (the CFA) gives no discretion. As between solicitor and client there is a contractual agreement to charge VAT as at the rate in force at the time the work is done. HMRC guidance does not override that.

  3. Kevyn Thompson Longmynd Legal Services

    Correct Graham

    At an assessment in Coventry despite the DJ accepting that I had a CFA case (not governed by the Law Society Conditions) and thus no interim billing done along the way he “felt” it was an unreasonable election for my solicitor who was cash registered for vat not to apportion vat. Cost my solicitor quite a bit. He was unimpressed that we would be paying vat at 20% throughout

  4. I still want to know why any receiving Party would want to be seen to elect to increase the claim for costs when the reality is that they will not get the benefit of any increase

    I can only presume its down to laziness in not wanting to sort apportionments at the back end of perhaps “sorting the accounts” at the back end and not accounting to the VAT man for the full 20% claimed throughout?

    surely not …..

  5. Simon.

    HMRC guidance clearly states that the VAT rate is dictated by the rate at the time of the bill to the client. So if a bill was rendered post 4/1/11 for work predominantly done in 2010, the HMRC would expect to see a bill inclusive of 20% as is the case in shops & hotels etc. But if the bill is for the provision of a service where the service covered work undertaken in 2010, or at a lower tax rate, then it was at the discretion of the solicitor to deliver a bill to his client apportioning between work done pre and post 4/1/11 and he must show the apportionment to be reasonable. As such, my earlier post is correct.

    Remember also in the case of a CFA, when a bill of costs is delivered to the other side, generally, the client is not yet in receipt of his actual bill.

  6. Simon, Looking again at your post, the CFA line is persuasive, but it is arguable that it is only a simple explanation of how we calculate our final bill, not accounting for the fact the VAT rate may go up, hence how they actually calculate it is based on the HMRC guidance.

  7. So we should ignore the term in the conditions, increase costs when no benefit other than to the tax man, ignore CPD that says bills should be split when VAT changes and ignore the law society guidence and examples on single supplies that confirm that a solicitor may split and charge different VAT rates?

    Again please explain why you would elect to claim the higher rate of VAT?

  8. im someone who is new to all this.but why do lawyers charge VAT in the first place its a sevice not a food store or a garage where you would expect to pay vat and the fact that you are not told about it till you are billed

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