Experts at the Institute of Legal Finance & Management explain the impact of today’s VAT rise on billing by solicitors, barristers and other lawyers
The same principles apply to today’s VAT rate change to 20% as were in place for the previous VAT rate change from 15% to 17.5% on 1 January 2010. So this is the best advice on how to deal with the change:
HMRC Special Rules
Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 4 January 2011 are liable to the 20% rate.
However, there are optional change of rate rules that you may be interested in applying. You can apply the rules selectively to different customers. Also, you can adopt them without notifying HMRC. You are unlikely to want to apply them if your customer can recover all the VAT you charge them (unless it is administratively more convenient for you). Adopting one of the optional changes will only benefit those clients who are not VAT registered.
The change of rate rules may be used where you performed services before 4 January 2011 and raise a VAT invoice and, in some cases, receive a payment after the rate change.
So, for example, if you issue a VAT invoice on or after 4 January 2011, for services that you completed before 4 January 2011, you can, if you wish, apply the 17.5% rate.
You can decide to apply these rules even after you have issued a VAT invoice showing 20% VAT. If you do, you must issue a special credit note giving credit for the extra 2.5% VAT, within 45 days of the rate change (i.e. by 18 February 2011). You should not cancel the original invoice. A credit note should contain the following details:
- The identifying number and date of issue of the credit note;
- Your name, address and VAT registration number;
- Your client’s name and address;
- The identifying number and date of issue of the VAT invoice;
- A description which identifies the services supplied; and
- The amount of VAT being credited.
It will happen that a service commences before 4 January 2011 and is still in progress after that date. The normal rule is that where an invoice is issued or a payment received after 4 January 2011, VAT is due at 20% even if part of the supply was undertaken before that date.
Often this is a result of a single supply of a service. Unless you have received payment or issued a VAT invoice before 4 January, the whole supply should be charged at the 20% rate under the normal rules. However, you may if you wish, charge VAT at 17.5% on the work done up to 4 January 2010 and 20% on the remainder. You will have to be able to demonstrate that the apportionment between the two amounts accurately reflects the work done in each period.
Information for solicitors
If you are a solicitor, most of your supplies are covered by the normal tax point rules, including a tax point on completion of the work. Where you issue a VAT invoice or receive a payment on or after 4 January 2011 for work that was completed before 4 January 2011, you may use the special rules and account for VAT at 17.5%. Where work commenced before 4 January 2011 but will not be completed until on or after 4 January, you can apportion the supply as detailed above.
If you receive standard monthly payments (SMPs) from the Legal Services Commission for legal aid work, the VAT treatment under the agreed procedures depends on the extent to which each payment relates to completed cases. The special change of rate rules can be applied to cases in progress at 4 January 2011 which have not already been partly paid for through an earlier SMP.
In other words, an SMP received after 4 January that relates to work on a case partly performed up to the date of the change, can be apportioned in accordance with the information detailed above. Where this applies, you can declare VAT at 17.5% on that element of the work.
Please also refer to the updated ILFM VAT guidance issued on legal aid work which can be downloaded from the ILFM website.
Information for barristers and advocates
If you are a barrister or advocate and you follow the arrangements under which fee notes do not become VAT invoices until they are receipted, then the tax point for your fees is normally the date you receive payment. Fees received on or after 4 January 2011 will be liable to VAT at 20%.
If you receive fees on or after 4 January for cases completed before that date, you can declare VAT at 17.5%. Similarly, if a fee received after 4 January 2011 includes services partly performed while the 17.5% VAT rate applied, you can apportion your fees as previously described.
If a business discovers that it has made mistakes, it should correct them through the normal error correction procedures, either in its current VAT return or, for larger mistakes, by submitting a form VAT 652 (see Notice 700/45 – How to correct VAT errors and make adjustments or claims).
A more detailed HMRC guidance note can be found by clicking here.