Further to the general information available on our website in respect of the VAT rate change, we are providing additional detail to clarify the complexities affecting solicitors’ practices as a consequence of applying the tax point rules.
The main difficulty for solicitors is determining whether a particular job is:
- a single supply of services provided over a period of time; or
- a continuous supply of services.
HM Revenue & Customs (HMRC) considers that the majority of supplies made by a solicitor are single supplies. This includes work undertaken over an extended period of time, such as PI claims and litigation, as well as more clearly defined one-off services, such as preparing a will.
Some types of legal work however, fall within the scope of the rules for continuous supplies of services. There is also a special rule relating to the extension of tax points which has been centrally agreed with HMRC allowing a 3 month extension of the 14 day rule.
The basic premise for VAT purposes is that payment is received when funds are in the office account. Monies held in the client account are not considered to be payments for the purposes of determining a tax point for VAT purposes. (Please note this does not include legal aid monies).
Below is an extract of HMRC’s guidance specific to solicitors and barristers:
Barristers and Advocates
If you are a barrister or advocate and you follow the arrangements under which fee notes do not become VAT invoices until they are receipted, then the tax point for your fees is normally the date you receive payment. Fees received on or after 1 December will be liable to VAT at 15%. If you have received fees before 1 December for cases that will not be completed until after that date you can recalculate VAT at 15%, but may need to issue a credit note to your instructing solicitor.
Solicitors
If you are a solicitor most of your supplies are covered by the normal tax point rules including a tax point on completion of the work. Where, before 1 December, you have issued a VAT invoice or received a payment for work that will not be completed until on or after 1 December, you can recalculate VAT at 15%, but may need to issue a credit note to your client to adjust the VAT.
Single Supplies of Services
Work Completed before 18 November 2008
For services which have been fully completed before 18 November 2008, the time of supply falls before the change in VAT rate and 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 on or after 1 December 2008.
Work Completed on or after 1 December 2008
Services which are not fully completed and invoiced until 1 December 2008 or later can be 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 a supply subject to 15% VAT. If a tax invoice has been issued previously in respect of the advance payment, a credit note will be required to adjust the VAT.
Invoices Issued in Advance
Tax invoices already issued for work which will not be completed until 1 December 2008 or later can be recalculated using the 15% VAT rate but a credit note must be provided to adjust the VAT.
Extension of the 14 Day Rule
HMRC has 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 reverts back 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 fees, 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 they are 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 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 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 from time to time) the services are treated as supplied each time payment is received or a VAT invoice is raised.
For solicitors, HMRC considers the following to be continuous supplies of services:
- Trustee services;
- retained legal adviser; and
- acting as client’s legal office.
This is not an exhaustive list, and you would need to consider each case, to determine whether it qualifies to be treated as a continuous supply of services.
Where a firm raises an invoice on/after 1 December 2008 the applicable VAT rate will be 15% provided no payment has been received in advance. This includes work in progress 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 1 December an apportionment can be made, if payment has been received in advance, to reflect services provided after 1 December, i.e. the element pre-paid can be apportioned with 15% applying to services provided on or 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 in the VAT rate. Replacement invoices must be issued for payments due on or after 1 December reflecting the 15% rate.
Conclusion
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 but, clients who cannot recover VAT will expect this to happen.
This may cause administrative issues in terms of consistency, monitoring etc, and you will need to ensure sufficient controls are put in place to monitor the changes and create an audit trail in the event of a visit from HMRC.
You will also need to ensure credit notes are raised to reflect adjustments made.
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 even if it is billed on or after 1 December.
These changes do not affect solicitors who use the cash accounting scheme.
If you would like more information about the recent changes, please contact Michael Bailey, Head of Vantis' Legal Group; Vaughn Chown, VAT Partner; or Jasvinder Gill, VAT Manager.
Alternatively, please complete and submit the online form below.