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How to account for VAT on counsel's fees.

The Law Society offers two approaches to dealing with VAT on counsel’s fees

A common question we’re asked is how to deal with VAT on counsel’s fees. The Law Society provides guidance on this and there are two approaches:

1. Treat the fee as your own expense

You reclaim the input VAT in the usual way and, when you invoice your client, include the net element of counsel’s fee. You then apply VAT to the total invoice. The output VAT is declared on your VAT return as normal and the input VAT may be reclaimed by your client.

So, for example:

Legal services (net of VAT)     £1,200.00

Counsel's fee (net of VAT)     £800.00

Total (net of VAT)     £2,000.00

VAT @ 20%    £400.00

Total - £2,400.00

Upon receipt of payment by your client, you can either:

- pay the entire £2,400 into office account and, by the end of the second working day following receipt, pay £960 (£800 plus VAT of £160) to counsel in settlement of their fee or transfer the unpaid counsel’s fee to client account pending payment; or

- pay £1,440 (£1,200 plus VAT of £240) into office account and £960 (£800 plus VAT of £160) into client account; or

- pay £2,400 into client account and transfer £1,600 (£1,200 plus £400 VAT) into office account within 14 days ("days" not "working days").

 

2. Treat the fee as supplied directly to your client

You can follow HMRC’s concessionary treatment and replace your firm’s name and address with that of your client or insert your client’s name and “per” immediately preceding your firm’s name and address. You treat settlement of the fee as a disbursement for VAT purposes and you need not then keep a record of the VAT in your own ledgers as the input VAT will be reclaimed by your client.

So, for example:

Legal services (net of VAT)  -  £1,200.00

VAT @ 20%  -  £240.00

Total  - £1,440.00

Counsel's fee (inc VAT)  - £960.00


Total  - £2,400.00

 

When using this approach, payment of counsel’s fee must not be made from office account. When payment is received from your client, you can either:

- pay £1,440 into office account and £960 into client account, or

- pay the entire £2,400 into client account and then transfer £1,440 into office account within 14 days

 

PLEASE NOTE: For law firms which choose not to hold client money, approach number 1 is the only option.