Value Added Tax (VAT) – how it is applied on legal aid accounts

If an individual receives legal services for a non-business purpose, that is, in their own personal capacity, for VAT purposes the services are deemed to have been provided in the place where the individual belongs (VATA Section 7A and Schedule 4A, paragraph 16(2)(d)).

UK VAT is therefore generally not chargeable where the services are provided to a client who is considered to reside overseas. However, it should be noted that supplies in relation to land in the UK are always chargeable to UK VAT (VATA, Schedule 4A, paragraph 1).

In legally aided cases involving ownership and related issues of United Kingdom property, VAT must be charged irrespective of the client’s place of residence.

Examples include possession proceedings, landlord/tenant cases or declaration of ownership claims. It will not include services relating to land on the administration of a deceased persons estate or where the services relating to land are incidental to a much larger transaction.

Although it is possible that you could provide legal services to clients who do not have a right to stay in the UK, in any type of advice and assistance, ABWOR or legal aid cases it is recognised that this is far more likely to occur in certain types of case than others.

For example, you will frequently be providing legal services to clients who do not have a right to stay in the UK in the following types of case:

• Advice and assistance for clients seeking asylum and in some immigration cases (counsels involvement will be restricted to opinions and such like where we have authorised the employment of counsel)
• ABWOR proceedings before the Immigration and Asylum Chamber of the First-tier or Upper Tribunal (counsels involvement will be restricted to where we have authorised the employment of counsel)
• Civil legal aid for Judicial Review proceedings arising from decisions from the Upper Tribunal (Immigration and Asylum Chamber) to refuse permission to appeal against a decision of the First-tier Tribunal or applications for permission to appeal to the Court of Session from the Upper Tribunal (Immigration and Asylum Chamber) including any subsequent appeal procedures;
• Civil legal aid for proceedings under the Child Abduction and Custody Act 1985, where the legal services are being provided to the petitioner.

What is an “overseas client”?

 For individuals receiving services in a personal capacity, section 9 VATA provides that they belong where they have their “usual place of residence or permanent address”.

“Usual place of residence” does not have to mean permanent residence although length of stay is a factor.

Three factors determine “usual place of residence”. These are established in a Tribunal decision of US AA Limited (LON/92/19504) as:

• where the person actually lives irrespective of homes and other countries
• where their family is; or
• where their job.

It is the individual facts of the case that will determine the answer.

 This issue usually arises in respect of the immigration status of an individual in the UK.

If a client’s asylum status is not yet determined (or has been determined and they have no right to stay), HMRC’s view is that, even though the client may be physically present in the UK, their place of residence can only be in the country from which they have originated.

The same VAT position will apply to other individuals with no right to stay, for example an illegal entrant who is not an asylum seeker.

Any legal services provided to asylum seekers (or others without a right to stay), whether for their asylum applications or in relation to any other areas of law, are supplied to them in their country of origin.

This places the service outside the scope of UK VAT and VAT is not therefore chargeable.

The tax point will be determined at the conclusion of the legal work, not the date that the claim is submitted and no apportionment should be necessary unless other work is done after the determination of the right to stay, when the client would be resident and VAT chargeable.

However, if VAT is chargeable for part of the life of the case or matter, for example because the legally aided client changes their residence during its course, the account will be apportioned accordingly.

However, VAT cannot be apportioned where a client is not subject to VAT at the commencement of a stage and VAT should not be paid where the account is chargeable under a fixed fee payment regime although that is only likely to arise in Scotland where the client is being provided with legal services in relation to summary criminal proceedings and the payment is under the fixed payment regime. If the client has lost contact with you before the case has concluded, it would be right not to charge VAT for the work done.

Once a person has been granted a right to stay (for example a person serving on overseas forces, students attending university in the UK, or self-employed nurses under contract) VAT applies as normal.

In cases where the client is resident, VAT should be accounted for in the usual way.

However, if the client is the sponsored person residing overseas, then VAT does not apply and is not accounted for.

Exceptional cases where clients who have no identifiable country of origin

An applicant without a right to reside in the UK who does not have an identifiable country of origin, might be considered not to “belong” anywhere.

In those circumstances they could not fulfil the condition under paragraph 16(1) Schedule 4A to VATA of belonging to a country other than the UK or the Isle of Man, and the place of supply is deemed, under section 7(2)(b) VATA, to be where the provider belongs.

UK VAT is, therefore, chargeable when the country in which the person ‘belongs’ has not been determined. However, it should be noted that HMRC guidance VATPOSS04600 states that such situations are likely to be exceptional.

Clients who have been granted a right to stay and overstay or where the right to stay is revoked

Where a client is granted, or otherwise possesses, the right to remain in the UK, the place of supply of services to them will remain the UK even if they subsequently overstay (section 3.8 VAT Notice 741A).

Where the right to remain is subsequently revoked, they should still be treated as resident in the UK for VAT purposes, such that VAT will continue to be payable on services provided to them, until the issue is finally resolved (through any appeal or other legal process).

See again the HMRC guidance VATPOSS04600, above.

You will need to be aware of your client’s immigration status in order to know how to treat the supply for VAT purposes correctly.

HMRC policy in relation to overseas clients is available at the HMRC pages on www.gov.uk/.

Any queries on VAT in individual cases should be referred to the HMRC’s National Advice Service on 0300 200 3700.

Guidance on VAT issues for business cases is that VAT paid can be offset as “input tax” where the proceedings relate to the business.

If the business client wins the case and gets an order for expenses, the paying losing party will pay net of VAT (i.e. not pay VAT) on the costs order.

This is a common feature in cases where you are seeking to enforce an award of judicial expenses.

However, it remains our responsibility to pay VAT on the legal aid costs incurred.

Those items that you treat as disbursements (outlays) and expenses are not always the same as those that HM Revenue and Customs classify as disbursements for VAT purposes. The correct treatment depends on whether the item of expenditure is:

• a cost incurred by the provider in the course of making a supply; or
• a disbursement incurred by you as the client’s agent, which is then charged to us.

Costs incurred by you in the course of supplying legal services to the client

 Any item incurred by you in the course of making your supply must be included in the value of the supply when VAT is calculated (Rowe and Maw v. Customs & Excise Commissioners [1975] STC 340).

The question to ask is whether or not the expenses incurred were an integral part of the provision of legal advice and the service to the client.

Some examples of such expenses which are an integral part of the service are your own travelling and accommodation expenses incurred in conducting the work.

If you have to go to court to represent the client the supply you make is not just the provision of advocacy and advice but includes your travel time together with the incidental travelling expenses.

As a general rule, allowable travelling expenses incurred by you in the performance of your client’s instructions are not VAT disbursements which are ancillary or separate to the overall charge for the work, but are part of the overall charge made for the work, and must be included as part of your overall charge for the purposes of the computation of total VAT payable.

In Rowe & Maw it was claimed that rail fares incurred by the solicitor in the course of carrying out their client’s instructions did not represent a taxable supply of services for VAT purposes since the payment by the client of the sum demanded was not consideration for the supply but rather reimbursement of sums incurred by the solicitors as agents on the client’s behalf.

The Court held that the expenditure was on the services supplied to the solicitors rather than to the client and so the charge made by the solicitor was part of the total consideration for all the services supplied to the client and therefore could not be divided for the purposes of calculating VAT.

Most public transport is zero rated for VAT. However, if the travel expenses that you incur includes VAT, the VAT should not be claimed or calculated twice.

For example, if you incur a taxi fare at £24.00 (£20.00 fare and £4.00 VAT) you should not then seek to claim for those costs at £24.00 plus £4.80 VAT.

True Disbursements (Outlays)

 Disbursements for the purposes of VAT are those amounts which are paid to third parties by you, acting as the agent of your client.

There are a number of conditions that must be satisfied before a disbursement may be treated as such.

Custom and Excise Notice 700, Paragraph 25.1.1: 

1. the solicitor acted as an agent for his client when paying the third party
2. the client actually received and used the goods or services provided by the third party to the solicitor
3. the client was responsible for paying the third party
4. the client authorised the solicitor to make payment on his behalf
5. the client knew that the goods or services would be provided by a third party
6. the solicitor’s outlay must be separately itemised when invoicing the client
7. the solicitor must recover only the exact amount paid to the third party
8. the goods or services paid for must be clearly additional to the supplies made by the solicitor to their client.

All of these conditions must be satisfied before a payment can be treated as a disbursement for VAT purposes.  The following may be treated as disbursements provided the guidelines set out above are adhered to:

1. company search fees
2. court fees
3. witness fees
4. sheriff officers fees.

Recent case law (First-tier Tax Tribunal in Brabners LLP v The Commissioners for her Majesty’s Revenue & Customs [2017] UKFTT 0666 and the obiter comments of the Court of Appeal in British Airways v J. Prosser [2019] EWCA Civ 547) has indicated a restrictive approach to what can be considered a true VAT disbursement.

Note in particular that since the Brabners LLP case, the HMRC concession that the fees for postal searches could be considered true disbursements has been withdrawn.

The Law Society of Scotland have also provided guidance on this issue:

(https://www.lawscot.org.uk/news-and-events/blogs-opinions/vat-on-disbursements/)

Because of the uncertainty as to the treatment of some disbursements, in particular in relation to experts’ reports and interpreters’ fees, where a provider is in doubt how to account for VAT they should contact either their HMRC office or their usual tax advisers.

How should VAT on disbursements be treated?

 You have two options.

The first and the most common approach is to pass on the cost of the disbursement to the client as a VAT inclusive amount (if taxable) and exclude it from the calculation of any VAT due on the main supply of legal services to the client. You cannot reclaim the input tax on the supply.

Unless the invoice for the disbursement is addressed directly to the client, the client is also prevented from reclaiming input tax as (s)he would not hold a valid VAT invoice.

Generally it is only advantageous to use this method of treating a VAT disbursement where the client is not entitled to reclaim the VAT. This generally happens in legally aided bills, except where the client can reclaim (for example where the proceedings were brought in the course of the client’s business which it is recognized will be very unusual).

Alternatively, services can be treated as supplied to and by you under Section 47(3) VATA. You can then reclaim the related input tax (subject to the normal rules) and must charge VAT on the onward supply if appropriate. If you supply goods and issue an invoice in your own name, you must account for VAT as if you were the seller.

When submitting your account there is a requirement that disbursements are detailed on your account.

The specification in the claim should make clear which VAT treatment is being claimed for the VAT component (that is, whether the disbursement is actually part of your supply of services or because it is a true disbursement invoice which contains a VAT element).

Your account will normally include the claim inclusive of VAT except where it relates to your own travel which are shown separately as the expense claim and the relevant VAT.

A concessionary treatment for counsels’ fees was agreed when VAT was first introduced in April 1973.

Under advice and assistance and ABWOR you may treat counsel’s advice as supplied directly to the client and the settlement of the fee as a disbursement.

Under legal aid Counsel should elect to apply on their fees the VAT rate applicable at the time the service was provided or apply the rate at the time that the total bill is presented.

However, where travel or accommodation expenses includes VAT, the VAT should not be claimed or calculated twice.

The VAT should never be double charged, merely accounted for.

Legally aided cases can generally be viewed as a single supply of services to the client, such that a uniform VAT rate can be applied to your account (including disbursements forming part of your supply of services to the client) based on the date of final work contained in your final account.

This will not apply to VAT that has been charged on a true VAT disbursement before the rate change.

However, other methods of accounting for VAT may be permissible, and providers should liaise with HMRC if they wish to claim VAT on a different basis.