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My post on Tuesday, concerning the change in VAT rates, confirmed two things. Firstly, how mind numbingly boring a topic it is. Secondly, how much difficulty this is causing law costs draftsmen, solicitors and others. The number of comments, both on the Legal Costs Blog and in emails I received, indicates that some readers are still not convinced by the analysis I gave. Whether dealing with a high value claim or large volumes of low value claims, this extra 2.5% is important.
I will therefore make one final attempt to set out the basic position as I understand it and hope never to have to write on the subject again.
I am going to make one important assumption here (and readers may think this is sensible or not), namely, that the Law society and Bar Council have got the basic position right.
I think the problem that many have with this issue is getting themselves bogged down in worrying over issues concerning the “basic” tax point and “actual” tax point. These issues are no doubt important under ordinary circumstances, but a change in VAT rates results, at least on this occasion, in special “change of rate rules”. This is the important issue to understand.
The Law Society Practice Note is clear on this:
“Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 01 January 2010 will be liable to the 17.5 per cent rate. However, there are optional change of rate rules that you may wish to apply:
- Where you issue a VAT invoice or receive a payment on or after 01 January 2010 for work that was completed before 01 January 2010 you may account for VAT at 15 per cent.
- Where work commenced before 01 January 2010 but will not be completed until on or after 01 January you can apportion the supply between that liable to 15 per cent and that liable to 17.5 per cent.”
Therefore, for a typical CFA funded case, with no interim invoices, you can charge VAT at 15% for the work done during the period the rate was 15%.
The Bar Council has issued a Guide for barristers that deals with the matter in a similar manner:
“There is, however, a special rule that applies on a change of rate. This applies where a service is provided before the change of rate but, under the special rules above, the tax point falls after the change of rate. The barrister may then elect for VAT to be applied at the original rate. In other words, a barrister who receives a fee on or after 1st January 2010 for work done before that date (but after 1st December 2008) can choose whether to charge 15% or 17.5%. A barrister paid after 1st January 2010 for work done before 1st December 2008 (the date on which VAT decreased to 15%) would have to charge 17.5%.
In practice, this means as follows:
(a) Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out during that period, VAT will be due at 15%.
(b) Where the fee is received between the 1 December 2008 and 31 December 2009 in respect of work carried out before the 1 December 2008, then VAT can be charged at 15% or at 17.5%.
(c) Where the fee is received on or after 1st January 2010, VAT will be due at 17.5% unless:
i) The relevant work was carried out before 1st January (and on or after 1st December 2008); and
ii) The barrister so elects.”
Again, ignoring issues of tax points, if the work was undertaken between 1 December 2009 and 1 January 2010 it is possible to charge at 15% for that work, regardless of when the invoice is raised or paid.
Both the Law Society and Bar Council refer to being able to opt/elect as to which rate to apply. This is where we come back to CPD 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 is no more than a reflection of the principle that a party should mitigate their losses. If a lower rate can be charged, it normally should be. It is hard to imagine where it would be reasonable to charge the higher rate.
One reader of the earlier post on this subject commented:
“It’s interesting to note that this has only become an issue for defendants since the VAT rate has reverted to 17.5%!!!!!!!! Nothing at all was heard about breaches of the CPD / defective bills etc whilst claims for costs were being presented to paying parties with VAT claimed at 15% throughout even when the work done covered pre and post 01.12.09!!!!!!! Strange that!!!!"
Not particularly strange, although no doubt true. When the rate was 15%, a receiving party could elect to charge 15% on all work if the claim settled between 1 December 2009 and 1 January 2010, including work undertaken before 1 December 2009 (assuming no interim invoices). Although a bill not drafted showing the split between the various periods was still, probably, technically defective, there was no point in complaining from a paying party’s perspective. The issue that arises now is that bills wrongly claim VAT at 17.5% throughout but then fail to split between the relevant periods. How is the poor Court meant to deal with this come assessment? Count every letter to see what pre-dates or post-dates the various changes so as to apply the correct rate? That is why the bill needs to be drafted properly and why defendants are now complaining when it is not.
I’ve posted links to the various VAT guides on Legal Costs Central.