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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:
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.