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Summary ULAW LPC, Solicitors Accounts Chapter Readings
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ULAW LPC, Solicitors Accounts Chapter Readings
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Intro to PP – WS2 Solicitors Accounts TIFF LIAOChapter 12 – VAT, Disbursements, Agency and Principal Method Page 129
INTRODUCTION
Brief outline of the way in which VAT works
Particular issues that arise in relation to firms providing services
VAT relevant to both the firms professional charges AND some disbursements paid by the firm on b/h of clients
GENERAL PRINCIPLES
TWO distinct aspects:
(1) Output tax = charged by a business to its customers; AND
(2) Input tax = charged to the business by its suppliers
A business registered for VAT charges its customers output for which it MUST then account to HMRC (unpaid tax
collector)
Possible for such a business to deduct input tax charged to the business from the amount accounted for to HMRC.
The standard rate of VAT has been 20% since 4 January 2011.
There is also a zero rate and a reduced rate which apply to some goods and services - EXEMPT from VAT
SUMMARY
Persons who are registered for VAT must charge their customers/clients VAT at:
(a) Zero
(b) Standard; or
(c) Reduced rate
On all taxable supplies of goods and services made in the course or furtherance of the business
AND can recover any VAT charged to the business.
A solicitors taxable supply will be increased by payments made to 3rd parties which DO NOT qualify as
disbursements.
Persons who make only EXEMPT supplies:
(a) DO NOT CHARGE VAT to their customers/clients AND
(b) Neither can they recover VAT charged to the business.
Firms MUST charge VAT on their supply of legal services BUT NOT disbursements paid on behalf of their clients =
these are NOT part of the supply of legal services.
To qualify as a disbursement, the supply MUST be for the client's use and NOT for the solicitor.
O If the payment is for an item required by the solicitor to provide legal services = NOT a disbursement.
It is part of the solicitor's fee for providing the service = The solicitor must charge VAT on the item.
The cost of a disbursement is simply passed on to the client.
If the disbursement includes an element of VAT charged by the original supplier, the firm will treat the disbursement
either on the agency basis or on the principal basis. The choice of basis is governed by to whom the invoice is
addressed.
If the invoice is (a) the whole payment is recorded on the cash account and client ledger WITHOUT distinguishing
addressed to the the VAT;
client, the firm (b) the firm can use client money to make the payment if there is sufficient available: if not, the firm
treats the uses its own money;
disbursement on (c) the firm must give the client the original supplier’s invoice if the client is registered for VAT.
the agency basis:
If the invoice is (a) the whole payment is recorded on the cash account, the VAT is recorded on the HMRC account
addressed to the and the VAT exclusive amount is recorded on the client’s ledger account;
firm, the firm (b) the VAT will be charged to the client when the firm bills the client;
treats the (c) the firm must use its own money to pay the disbursement even if client money is available;
disbursement on (d) the firm must give the client a VAT invoice covering BOTH the professional charges of the firm and
the principal the VAT on the disbursement;
basis: (e) in the case of counsel’s fee note, the firm is allowed to cross out the firm’s name and add the
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TIFF LIAO
, Intro to PP – WS2 Solicitors Accounts TIFF LIAO
Chapter 12 – VAT, Disbursements, Agency and Principal Method Page 129
client’s; the invoice can then be dealt with on the agency basis.
(a) OUTPUT TAX
DEFINITION: Value added tax is chargeable on the supply of goods or services where the supply is a taxable
supply and is made by a taxable person in the course or furtherance of a business carried on by them - (Value
Added Tax Act (VATA) 1994, s 4(1)).
ELEMENTS of DEFINITION:
Comprises all forms of supply whereby the whole property in goods is transferred incl. gift of
(a) SUPPLY goods.
OF GOODS
Anything which is NOT a supply of goods, but is done for consideration.
(b) SUPPLY
OF Gratuitous supply for services is NOT a supply for VAT purposes, in contrast to a gift of goods
SERVICES
Means ANY supply of G/S other than an EXEMPT supply
Exempt supplies = listed in Sch 9 to the VATA 1994 and include supplies of land (except for
new commercial sales and leases of commercial property where the supplier has opted to be
(c) TAXABLE taxable), insurance, some postal services, finance, health services, and burial and cremation.
SUPPLY
Taxable supplies may be divided into 2 main categories:
(1) Those which are chargeable at the (legal services + solicitor providing insurance)
standard rate 20%.
(2) Those which are chargeable at a zero (food, water, books, international services and
rate 0% – listed in Sch 8 to the VATA transport)
1994
Reduced rate of 5% = applies to mobility aids, domestic fuel, installation of energy saving
materials, smoking concession products (nicotine patches), alteration of certain dwellings and
residential conversions, children’s car seats and carrycots with restrain strap)
Zero-rated and exempt supplies are similar in that NO VAT is actually charged in either case by
the supplier to their customer.
However, they must be carefully distinguished, since only a person who makes taxable supplies
is able to recover input tax, ie, the VAT charged to them by their suppliers.
A firm supplying legal services will be making a standard-rated supply. Legal services include
professional charges and some payments made for clients (see below). A solicitor supplying
insurance will be making an exempt supply.
A person is a taxable person if they are or are required to be registered under the Act.
A person MUST register if:
(d) TAXABLE the value of taxable supplies (not profit) in the preceding 12 months EXCEEDS a figure
PERSON specified in each year’s Budget (£85,000 for 2021/22).
A firm of solicitors will virtually ALWAYS have to be registered.
NB: voluntary registration is permitted. A person may register voluntarily in order to recover input
tax charged.
VAT is chargeable by a taxable person ONLY on taxable supplies made in the course or
(e) BUSINESS furtherance of a business carried on by them.
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TIFF LIAO
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