Key Takeaways from the Professional Practices Sector Webinar: Navigating VAT Challenges and Pitfalls

Our webinar held on September 12, 2023, provided valuable insights into the VAT challenges encountered within professional practice firms and highlighted strategies to steer clear of common pitfalls.

Tax point rules

There are specific rules relating to when VAT needs to be declared to HMRC. The time when VAT needs to be declared to HMRC is called a ‘tax point’. With the exception of a three-month extension to the 14-day rule to issue tax invoices, there are no special tax point rules for supplies made by solicitors. Solicitors need to use the normal rules for determining when VAT needs to be declared to HMRC.

Solicitors will generally make single supplies for VAT purposes, even though the transaction may involve work undertaken over an extended period of time. The tax point occurs when the services have been fully completed, this is called the basic tax point. The actual tax point can be delayed if the solicitor issues a valid tax invoice for the work, provided this occurs within the 14-day statutory requirement or the three month extension covered by the framework negotiated between the Law Society and HMRC.

If a solicitor makes supplies on a regular basis to a specific client, this will normally represent a series of separate supplies from a VAT perspective. Each supply will have its own basic tax point, and the solicitor will need to account for VAT when each individual service has been completed.

Payments into client accounts

The receipt of a payment into a client's account does not constitute payment for services provided by the solicitor from a VAT perspective. Payment for the solicitor’s services only occurs when money is transferred from the client's account to the solicitor’s general office account.

Standard monthly payments for legal aid and contracting work

Under Legal Services Commission ‘contracting’ arrangements, solicitors that undertake criminal and civil legal aid work receive a standard monthly payment (SMP) which is based on the anticipated level of work that they will undertake during the forthcoming year. The solicitor will issue a bill once the work has been completed and the fee will be allocated against either payments already received or against future payments depending on whether the level of work already exceeds the value of SMPs received or vice versa. SMPs are routinely adjusted throughout the year to take account of any differences in the level of work undertaken.

The basic tax point occurs when all the work, except the invoicing, has been completed. VAT must be accounted for on the services provided when the work has been completed. Therefore, the extent that an SMP relates to a case that has been completed, and the basic tax point has occurred, the actual payment will not create a tax point. However, if any part of the SMP will be offset against ongoing cases, or work that has not commenced, then it will represent an advanced payment in respect of those supplies which will create a tax point by reference to the cash received.

Place of supply of services

Understanding the place of supply for services is crucial. In general, services provided to UK clients, whether businesses or individuals are subject to UK VAT. Services provided to either businesses or private individuals outside the UK are not subject to UK VAT.

Invoices issued to non-UK business clients within the EU should ideally include the clients’ EU VAT number and make it clear that the customer is responsible for accounting for the VAT due.

Invoices issued to private clients in certain EU countries may be liable to EU VAT by reference to the residence of the client.

Disbursements

Disbursements can be complex, and it is essential to understand their treatment for VAT purposes. Disbursements are costs paid to third parties on behalf of a client and are typically not subject to VAT. However, specific conditions must be met, including separate itemisation on invoices and recovering only the exact amount paid to the third party. It is crucial to distinguish disbursements from regular expenses to avoid common VAT errors.

Common errors

There are recurring errors that commonly occur in professional practices within various areas:

• Motoring – VAT on fuel
• Motoring – VAT recovery on cars
• Business entertainment
• Aged creditors
• Evidence to support input tax claims

Good housekeeping

VAT Bad Debt Relief

Unpaid sales invoices can result in VAT bad debt relief. After six months beyond the payment due date or the invoice date, you can claim back the output VAT paid to HMRC. Adjust your VAT return accordingly.

Input VAT Accruals

Accelerate VAT recovery by accruing input tax, improving cash flow. Be sure to reverse and replace the input VAT accrual in the next period.

Miscellaneous VAT Errors

Avoid common errors related to motoring expenses, staff entertainment, subsistence expenses, employee purchases using company credit cards, and coding errors.

Get in touch

Successfully navigating the VAT landscape as a solicitor requires a keen understanding. It is essential to stay informed and diligent to ensure compliance with VAT regulations in your legal practice. 

If you have any enquiries about the topics discussed in our presentation or require assistance with any matter, please do not hesitate to reach out to us.