Legal Focus, part four: VAT – a reminder of why tax law is so lengthy

Part four of the Legal Focus guide

Hazlewoods are pleased to announce a six-part series on current topics of financial business interest, entitled Legal Focus. This week, we will be releasing a daily guide produced specifically for the legal sector.

For VAT purposes, the supply of solicitor’s services will be subject to the normal rules for charging VAT at the time of supply of services. The time of supply is normally when the supply is completed. This is called the “basic tax point”. VAT has to be accounted for in the VAT quarter in which the tax point falls.

However, this tax point can be overridden by an “actual tax point”, as per the following:

  • The time when a payment is received or a VAT invoice issued, whichever is the earlier, if it is before the basic tax point.
  • The time at which an invoice is issued if it is within 14 days of the date of the supply. However, if the invoice is issued 15 days or more after the completion of the service, then the actual tax point will be the basic tax point.

In the legal sector, we all know that sometimes it can be difficult, or even impossible, for solicitors to decide on a fee before a service is provided, because of the nature of their work.

In those situations, the supply may be treated as taking place at the time when the solicitor issues a VAT invoice in respect of it, provided that the invoice is issued no later than three months after the date of performance of the services. However, if the invoice is issued more than three months after the service was completed then the tax point will revert back to the basic tax point.

Single supply?

The majority of the supplies made by solicitors are ‘single supplies’, i.e. a single service is delivered. Here, each supply will have its own basic tax point. This will still be the case where the solicitor is making supplies to an individual on a regular basis or where the supplies will span a number of years and billing occurs on a periodic basis. The issue of a periodic invoice will create an actual tax point and VAT will need to be accounted for in the VAT period in which the actual tax point falls.

Continuous supply?

However, there are certain supplies of services (such as acting as trustees or where the solicitor is retained and remunerated as a ‘permanent legal adviser’ or acting as the client’s legal office) that will be inherently continuous in nature and as such, there will be no basic tax point. An actual tax point is created whenever an invoice is issued or payment is received, whichever is the earlier. Firms that are involved in making a continuous supply can issue what is called a ‘request for payment’ instead of a periodic VAT invoice. A request for payment does not create an actual tax point.

Money held on behalf of clients, and disbursements

Although solicitors are subject to the normal tax point rules as they apply for advance payments, monies received from a client into the firm’s client bank account do not create an actual tax point for VAT purposes. A tax point is only created when monies are transferred from the client bank account to its office bank account.

Similarly, monies received from client that represent reimbursement of expenses paid on the client’s behalf (such as stamp duty and land registry fees) do not create a tax point for VAT purposes.

Place of supply

The place of supply will determine where VAT is accountable. Additionally, the place of supply for services will be determined by whether the supply is a business to business supply (B2B) or a business to customer supply (B2C).

If the supply qualifies as a B2B supply then the place of supply will be where the customer is located, and VAT will be accountable in that country. On the other hand, if the supply qualifies as a B2C supply then the supply is deemed to take place where the supplier belongs. Hence, VAT will be accountable in the country where the supplier belongs.

It has to be mentioned that where the supply is a B2B supply and the client is VAT registered and located in a different EC Member state then VAT will have to be accounted for by the client in its member state via reverse charge. The supplier will need to zero rate their supplies and add the wording “reverse charge” on their sales invoice.

However, there are certain services where the place of supply is not influenced by whether the supply is B2B or B2C, but rather by specific VAT rules. These are as follows.

Supply of services relating to land

If the supply of services is related to land or property, the place of supply of those services is where the land itself is located, rather than where the supplier or their customers belong. This will include services such as conveyancing, surveying or valuation of properties. However, the services must be directly related to land.

If not, then the supply would follow the normal place of supply rules for services.

An example of a service that is not directly related to land is services provided in drawing up a will that contains land as an asset.

Services provided to clients resident outside the EU

There is a special VAT provision in regards to the place of supply rules for ‘lawyer services’ where the recipient of those services is a non business customer belonging outside the EU. In this case, the supply is deemed to be made in the country where the recipient belongs and will fall outside the scope of UK VAT.

Easy isn’t it?

This release has been prepared as a guide to topics of current financial business interests. Hazlewoods strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by Hazlewoods.

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