3. Dealing with VAT

Question 1

What are input and output VAT?

Answer 1

1. Input: Tax charged to a business by its suppliers
2. Output: Tax charged by a business to its consumers

Question 2

What does a taxpayer account to HMRC for?

Answer 2

The difference between input and output tax

Question 3

Is VAT payable on professional fees payable to HMRC whether the firm has been paid or not?

Answer 3

Yes

Question 4

What is the outcome if VAT is not separately listed on the bill for legal services?

Answer 4

The fee listed is deemed to include VAT and further VAT is unable to be charged

Question 5

Who is the only party who can use an invoice to reclaim input tax?

Answer 5

The party to whom the invoice is addressed

Question 6

Are disbursements subject to VAT under professional fees?

Answer 6

No, the cost of the disbursement is just passed on to the client

Question 7

What are some of the conditions that will need to be met if something is to be regarded as a disbursement?

Answer 7

1. Firm paid supplier on client’s behalf as agent
2. Client received, used, or had the benefit of the goods or services paid for on their behalf
3. Client was responsible for paying the third party
4. Client authorised firm to make payment
5. Client is aware goods/services were from another supplier

Question 8

What are five examples of things which are not disbursements?

Answer 8

1. Phone call charges
2. Travel expenses whilst working on a client matter
3. Postage fees when sending letters to clients
4. Photocopying charges and bank fees
5. Property search fees

Question 9

When might a VAT problem arise with a client and what determines how this is resolved?

Answer 9

If the client is registered for VAT themselves and wishes to reclaim the VAT, how it is dealt with is determined by whether the invoice is addressed to the client or the firm

Question 10

What method is used where the invoice is addressed to the client, and what does this entail?

Answer 10

Agency method, whereby the supply will be treated as being made to the client, and the firm pays the entire amount including the VAT added by the supplier, with business or client money as appropriate, and records the total amount in its records

Question 11

What method is used where the invoice is addressed to the firm, and what does this entail?

Answer 11

Principal method, whereby the firm pays the fees and VAT using business money even if there is enough in the client account, and then resupplies the service to the client at the same price but splits this down into Profit Costs and added VAT like a normal bill

Question 12

What is the exception where the Principal Method would normally be used, but the Agency Method is okay?

Answer 12

If the firm receives an invoice for legal counsel fees addresses to the firm, they can cross out the firm name and replace it with the client name, and pay by the agency method