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HMRC review of VAT concession on counsel’s fees

Tom Owen, Senior Manager, VAT and Customs Duty services
08/09/2021
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HMRC has announced it is reviewing an old VAT concession regarding solicitors passing on counsel’s fees to their clients. The current position stands for the time being, and if the concession is withdrawn, it would be done on a prospective basis, with advanced notice given.

HMRC acknowledges that most taxpayers are unaware of the concession, which dates back to 4 April 1973, and is therefore looking to understand better whether the concession is used by solicitors, and whether there are any advantages or disadvantages in doing so.

This concession relates to counsel’s fees only, not other costs (to which the normal rules on “VAT disbursements” apply).

How the concession works

The concession is with regards to counsel fees paid by solicitors on behalf of their clients, and allows solicitors to treat the recharge in a couple of ways.

Firstly, the recharge could be treated as a disbursement of costs, which would be outside the scope of VAT. This is on the basis that the solicitor had merely paid the counsel fees on behalf of their client. The invoice issued by counsel would be seen as a valid VAT invoice for the solicitor’s client, to allow that client to reclaim VAT incurred on that invoice, subject to the normal VAT rules applying to that client.

Alternatively, the solicitor could treat the counsel’s fees as their own expenditure, and the recharge to the client of those costs within the law firms fee for their services would be subject to the VAT charged by the law firm on its fee.

How to share your views on the concession

The Law Society welcomes comments from relevant taxpayers (such as solicitor sole practitioners and law firms) which it will share with HMRC as part of the review.

Details of how you can contact the Law Society can be found in the Law Society article, Confirmation and review of VAT concessionary treatment for counsel’s fees – share your experiences.

The deadline for sharing comments is 30 September 2021.

General considerations

There have been some recent high-profile cases regarding recharges and disbursements, and these have helped to interpret the HMRC rules on distinguishing what would be a taxable recharge or a VAT-free disbursement.

The significant decision in the case of Brabners LLP concerned the recharging of electronic property search fees and led to much debate and comment. As a result, the Law Society refining its guidance to help clarify the strict HMRC conditions for disbursement treatment of external costs passed on by law firms.

In general terms, these matters can present issues for firms, as the VAT rules on disbursements are often misunderstood or overlooked, and depend on the contractual and commercial position agreed with the end client.

If you often make recharges or VAT free disbursements to your clients, then we recommend reviewing the appropriate rules.

If you have any questions about the issues raised in this article or to discuss your firm’s circumstances get in touch with your usual Crowe contact.

Insights

From 1 December 2021 property searches by post will be no longer be VAT-free.
Law firms will need to consider the VAT treatment of all their disbursement charges.
Law firms need to consider their own treatment of all disbursements.
Further information for firms on the need to assess their position and make a decision about what action to take.
From 1 December 2021 property searches by post will be no longer be VAT-free.
Law firms will need to consider the VAT treatment of all their disbursement charges.
Law firms need to consider their own treatment of all disbursements.
Further information for firms on the need to assess their position and make a decision about what action to take.

Contact us

Robert Marchant
Robert Marchant
Partner, VAT and Customs Duty services
London