A number of visitors to the Legal Costs Blog have been searching for clarification of how the change in the VAT rate impacts on solicitors’ fees and how VAT should be dealt with when drafting bills of costs. This post will try to cast some light on the issue. The main sources of information on this point are the not overly helpful HMRC website (see link) and the far more helpful VAT practice note on the Law Society website (see link). The examples below are partly based on those given in that practice note. The notes states: “the Law Society will not accept any legal liability in relation to” its practice notes. The same applies here.
This guidance is concerned with the limited issue of the appropriate rate to be claimed between the parties in civil litigation claims. Entirely different rules may apply in other situations. This is an idiot’s guide designed to be as easy to understand as possible (no use of terminology such as “basic tax point”).
Prior to 1 December 2008 the VAT rate was 17.5%.
Between 1 December 2008 and 31 December 2009 VAT was reduced to 15%.
VAT returned to 17.5% on 1 January 2010.
In a number of situations a solicitor can elect whether to charge VAT at 15% or 17.5%. However, we are concerned with the position of costs recovery between the parties. The Costs Practice Direction reads:
“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.”
It is hard to imagine a situation where a receiving party would be able to reasonably elect the higher rate. We will therefore proceed on the basis that the lowest rate available is the rate that should be claimed in an inter partes bill of costs.
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2009. The claim concludes in December 2009. Costs payable by the other side. VAT should be claimed at 15% throughout. (This assumes the bill of costs was also drafted in December 2009.
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2009. The claim concludes in 2010. Costs payable by the other side. VAT should be claimed at 15% on the work carried out before 1 January 2010 and 17.5% on the remainder of the costs.
Solicitor instructed in relation to personal injury claim. Instructions received and retainer commences in January 2006. The claim concludes in December 2009. Costs payable by the other side. Costs are not agreed or assessed until April 2010 and further work is undertaken with regards to that. Provided that no interim invoices have been raised or payments received over the entire course of the matter, which would be the case if there was a conditional fee agreement, then VAT should be claimed as follows:
· 17.5% in relation to the period from January 2006 to 30 November 2008
· 15% in relation to the period from 1 December 2008 to 31 December 2009, and
· 17.5% in relation to the period from 1 January 2010 to April 2010
If an interim invoice was raised during the course of the matter, then the rate to claim will be the same as that on the invoices issued.
The Law Society’s practice note gives an example where the facts are similar to Example 3 above but each party is to pay their own costs. If an invoice is raised in January 2010, the practice note claims that all work done prior to 1 January 2010 can be charged to the client at 15% including the work done prior to 1 December 2008. It seems a strange anomaly, if correct, that the pre-1 December 2008 rate retrospectively increases on an inter partes bill but not on a solicitor own client invoice. Most bills drafted in 2009, at least in CFA cases, claimed VAT at 15% throughout even if the claim had started pre-1 December 2008. Any VAT experts out there should feel free to comment (just don’t get too technical).
The rate of VAT claimable in respect of disbursements will depend on the date on which the invoice for the disbursement is issued, regardless of when the disbursement was incurred.
It appears that the same rules apply as for solicitors’ fees.
At the end of last year I began to see a number of bills of costs where VAT was claimed at 15% but on the basis that if costs were not agreed and/or paid by 1 January 2010 the rate would increase to 17.5%. There appears to be no basis for this suggestion.
Now lets all hope that they stop messing about with the rates.