Annex 28E
Treatment of VAT on counsel’s fees – practice information
The 1991 accounts rules provided that unpaid counsel’s fees should be paid into and kept in client account, rather than in office account as was possible under the previous rules. The 1998 rules allow unpaid counsel’s fees to be held temporarily in office account for a short period before payment or transfer to client account.
This has raised the question of how the solicitor should deal with the VAT element on such fees.
Unpaid counsel’s fees paid into and kept in client account
The position with regard to VAT on counsel’s fees paid into and kept in client account is that by concession of the Customs and Excise, solicitors may either:
Method (i)
treat the fee as their own expense (and thus reclaim the VAT element as input tax);
or
Method (ii)
cross out their name on the receipted fee note and replace it with the name of the client. In this case the supply is deemed to be made direct to the client (who can reclaim the VAT if registered) and no VAT record need be kept in the solicitor’s books.
If method (i) is used, when the solicitor delivers his own bill of costs, the value of the supply for VAT purposes is the value of his or her own costs, plus the tax exclusive value of counsel’s fees. Thus in this case the solicitor is charging output tax on a higher level of supply.
The following examples show the effect of the two methods:
Assume solicitor’s profit costs as £1,200 plus £210 VAT and the bill includes unpaid counsel’s fees of £800, plus £140 VAT:
Method (i)
The £140 VAT on counsel’s fee note is treated as the solicitor’s input tax and can be reclaimed from Customs and Excise. When the solicitor’s bill is delivered it must show:
Value of supply:
| Costs | 1,200.00 | |
| Counsel’s fees | 800.00 | |
| 2000.00 | ||
|
VAT |
350.00 | |
| 2350.00 |
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