To VAT or not to VAT… it can be the question

19 October 2013

The VAT liability of legal services should be relatively straightforward. However, that is not always the case.

Since 1984, there has been the possibility for legal services to be outside the scope of UK VAT when provided to a customer resident/established outside of the EU and, where located within the EU in business.  This has caused some complications but can be readily resolved.

Services relating to land were excluded from this principle and remained subject to UK VAT where the land was in the UK. Whilst the changes to the VAT place of supply rules in January 2010 brought more services within the ambit of being outside the scope of UK VAT (the ‘general rule’) this largely did not impact on providers of legal services. Indeed, the land related services principle still applies as “Services such as supplied by estate agents, auctioneers, architects, surveyors, engineers and other involved in matters relating to land” are excluded from the general rule.

This is an area which has caused complications where the services involve UK property related matters which are supplied to a customer outside of the UK. For example building works to a commercial property owned by a non-EU resident landlord are undertaken and are paid for but two years later are found to be defective and legal action is taken to obtain damages.

Many legal advisors have taken the view that UK VAT is due in such circumstances, which protects their position, but: 
a) is that right?; and
b) would the client be happy to establish that no VAT was in fact chargeable and, potentially, they cannot obtain a refund?

Our view is that the answers to these questions are ‘no’ and ‘no’.

HMRC has provided limited guidance on this.  HMRC’s Public Notice 741A covers the place of supply of services and, at paragraph 6.4, HMRC gives the following examples of land related services:

Services of estate agents, auctioneers, architects, solicitors, surveyors, engineers and similar professional people relating to land, buildings or civil engineering works. This includes the management, conveyancing, survey or valuation of property by a solicitor, surveyor or loss adjuster.
Legal services such as conveyancing or dealing with applications for planning permission.
However, the public notice goes on to state:

“This place of supply rule applies only to services which relate directly to a specific site(s) of land or property. It does not apply if a supply of services has only an indirect connection with land, or if the land-related service is only an incidental component of a more comprehensive supply of services. ....”

Effectively, the specific piece of land needs to be a central and essential part of the service provided!

The only specific example HMRC provides in their public notice in respect of legal services is that the following is not a land related service: “The legal administration of a deceased person’s estate which happens to include property. These are lawyers’ services.”

HMRC’s internal guidance provides an example of a Jersey resident who had acquired a title to a flat in the UK but had to go to court to secure it.  The Tribunal concluded that the litigation was connected with property in the UK and, therefore, VATable.  This seems to be HMRC’s view but is arguably incorrect.

The VAT Committee, an advisory committee consisting of the European Commission and representatives from the member states, including HMRC, has discussed the scope of ‘land related services’.  Whilst not binding, its view can be seen as a useful aid when interpreting the European VAT directive. 

The Committee concluded that ‘land related services’ covered services relating to the conveyance or transfer of a title to immovable property as well as certain interests in immovable property or rights in rem treated as tangible property, such as notary work, or on the drawing up of a contract to sell or acquire such property but did not cover:

‘Legal services..., connected with contracts, including advice given on the terms of a contract to transfer immovable property, or to enforce such a contract, or to prove the existence of such a contract, where such services are not specific to a transfer of a title on an immovable property.’

This can be a grey area and we would suggest that careful consideration is given to the nature of the work undertaken and the location of the client (merely invoicing an overseas address is not sufficient) to determine whether UK VAT needs to be charged.  The penalties can be severe for getting it wrong.

In terms of the example posed earlier in this article, our view is that legal advice in respect of litigation for breach of contract is not a land related service and so should be invoiced VAT free.

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