Value added tax for legal services

Question 1

What are the two distinct aspects of VAT?

Answer 1

The two distinct aspects of VAT are output tax, which is charged by a business to its customers, and input tax, which is charged to the business by its suppliers.

Question 2

What is a taxable person?

Answer 2

A taxable person is someone who is or is required to be registered under VATA 1994.
A person must be registered if the value of their taxable supplies in the preceding 12 months exceeds a set amount, which was £90,000 in 2024/25.

Question 3

Provide some examples of disbursements for VAT purposes

Answer 3

Some examples of disbursements for VAT purposes are:
● Inheritance tax
● Capital gains tax
● Stamp duty and stamp duty land tax
● Estate agents’ fees
● Counsel’s fees
● Land Registry fees for registration of title
● Court fees
● Incorporation fees
● Probate fees

Question 4

When does the principal method need to be used for disbursements?

Answer 4

The principal method must be used when the invoice for a disbursement is addressed to the firm rather than the client.
This means the supply is treated as made to the firm first, and the firm must use business money to pay the supplier’s fees and input tax.
The firm then resupplies the item to the client at the same price, charging output tax on both the professional charges and the disbursement.

Question 5

Explain the concessionary treatment for counsel’s fees.

Answer 5

Although counsel’s fee notes are usually addressed to the firm, which would require the principal method, a concessionary treatment allows firms to alter the fee note so it is addressed to the client.
This means the agency method can be used, and the firm simply gives the fee note to the client for them to reclaim the input tax.
The firm should keep a copy of the amended fee note for potential cost assessments.