One of our clients is a London-based barrister who receives instructions from overseas law firms. Some of these firms have a London office, but some have no UK presence at all. We know that at least one is located in the Far East.
These instructions concern a number of transactions with a UK angle; some relate to UK property purchases, others relate to the acquisition of UK companies (some simply off the shelf) and others deal with investments being made from overseas into British banks and (occasionally) London branches of overseas banks.
We realise that this is a complex issue, but would appreciate some pointers to help our client (and her clerk) ascertain the correct VAT treatment for her fees in such cases.
Query 17,198 — Clerkwell.
Reply by S.G.:
It is important from the outset to establish that work done by a barrister is a supply of 'services' (as opposed to the supply of goods). This distinction is crucial in determining the VAT treatment. Furthermore, where there is a supply of international services it is essential that the 'place of supply' is determined. There are four different factors that determine the 'place of supply'.
1. Location of the supplier.
2. Location of the customer.
3. Where the work is physically being carried out.
4. Where any work on goods is involved.
Note that the 'default' position is 1 above, i.e. the location of the supplier determines the place of supply.
Once the place of supply has been determined:
(i) If the place of supply is in the UK then 'normal' UK VAT will be charged ('normal' — most supplies of services will be at the standard UK VAT rate of 17.5%, including supplies made by barristers; but others could be subject to the reduced 5% rate, or zero rated).
(ii) If the place of supply is outside the UK, then no UK VAT is charged on the supply (with one minor exception — see below).
I will take each of Clerkwell's points in turn. First, relating to the UK property purchases; there is a list of services where the place of supply is determined by where the 'land' is located (see SI 1992/3121 Art 5). Part (c) 'services such as are supplied by estate agents, surveyors, engineers … and others involved in matters relating to land'. The catch-all 'and others' would therefore encompass work done by barristers in connection with land (and property). So the place of supply of the barrister's services relating to the UK property purchases are supplies made in the UK. Therefore, UK VAT at the standard rate must be made. Note that services relating to land comes under item 4 in the list above — 'where work on goods is involved' (in this case goods meaning land/property).
Turning now to the acquisition of UK companies (whether existing or off the shelf), these are not transactions in land and so item 4 in the list above is not in point. VATA 1994 Sch 5 lists services which are supplied 'where received'; i.e. the place of supply is deemed to be where the customer is located — (item 2 in the above list). Para 3 of Sch 5 includes the words 'lawyers' … and 'other similar services'; i.e. services supplied by barristers would fall under this paragraph. At this point it is important to determine if the customer (the overseas law firm) is based inside or outside the EC. Clerkwell mentions that some of the law firms have a London office, some have no UK presence at all and one is located in the Far East.
- If the law firm instructing on the acquisition of the UK companies is based in another EC country, then in order for the barrister to be able to not charge UK VAT, the EC based law firm must receive her services for 'business purposes'. In this scenario, this is indeed the case and so no UK VAT is charged on the supply to the law firm(s) in the EC instructing on this type of transaction. Note however, that even though the barrister would not charge UK VAT in this instance, the EC customer (law firm(s)) is still 'accountable' for VAT in their own country and this is dealt with through the 'reverse charge mechanism'.
- If the law firm is based outside the EC (for example, the firm based in the Far East), then the place of supply is always 'outside the scope' of UK VAT, irrespective of the status of the customer (i.e. regardless of whether they use the services for business purposes or not).
Turning now to the final type of transaction mentioned in the question — inward investments into the UK. The treatment for UK VAT again falls under item 2 in the list — location of the customer; as the services are being supplied by a barrister and do not relate to the supplies of land. The same VAT treatment therefore applies as for the transactions in acquiring UK companies mentioned above.
To summarise then, these three types of transactions fell under either item 2 or 4 in the list used to establish 'place of supply'. The location of the barrister (UK) — item 1 in the list; and where the work was being physically carried out (again UK) were not relevant in this case in determining the place of supply. The 'decision flow' in determining the place of supply should always be as follows:
- First, is it a supply of services relating to the supply of land (as per SI 1992/3121 Art 5)? If 'yes', the supply is where the land is located; if 'no', then…
- is it a supply of services contained in VATA 1994, Sch 5? If 'yes', the supply is where the customer belongs (and one also needs to determine whether the customer is based within or outside the EC); if 'no', then…
- is it a supply where the work is performed (see SI 1992 No 3121 Art 15)? If 'yes', the supply is where the work is performed; if 'no', then…
- finally, the place of supply is the location of the supplier (default position).
Following these questions through should lead to the correct result.
Reply by Neil Warren, Author of Tolley's VAT Planning 2007/08:
The rules concerning VAT and international services are always a challenge — and the starting point is to determine the 'place of supply' of the service being performed.
- If the place of supply is the UK, the charge is subject to UK VAT in the usual way (17.5% for legal services).
- If the place of supply is outside the UK, the service provided is outside the scope of UK VAT.
So what determines the place of supply? In reality, there are four main situations that determine the place of supply.
- The location of the customer — if a business is providing what is known as a 'Schedule 5' service (VATA 1994, Sch 5) to either a business customer based in the EU (outside the UK), or any customer outside the EU (business or private), the place of supply is the country where the customer is based i.e. where the customer has his normal place of business or residence and where he is generally established.
- The place where the work is performed — not relevant to legal services.
- The location of land — see below in connection with legal services.
- Where the supplier is based — again, not relevant to Clerkwell's client.
As far as Clerkwell's client is concerned, the situation is as follows:
- VATA 1994, Sch 5 para 3 includes 'the services of consultants, engineers, consultancy bureaux, lawyers, accountants and other similar services … (but excluding from this head any services relating to land)'. This means that all non-land related legal work performed by Clerkwell's client for a business customer who has his normal place of business in the EU (outside the UK) or any customer based outside the EU (business or private) is outside the scope of UK VAT. This would include the legal work relevant to the investments.
- The exclusion of land related services from the Sch 5 rules means the place of supply for any work relating to land will depend on where the land is located. For example, if Clerkwell's client is working for a German-based client in relation to UK property purchases, then UK VAT must be charged in the normal way. The location of the customer then becomes irrelevant.
As a final comment, the tribunal case of Kenneth Daunter (20120) may be of interest. This case concerned the VAT position of legal services provided to Mr Daunter, in connection with the title of a property following the death of a Mrs Haynes, for whom Mr Daunter had provided finance to buy a council flat. Mr Daunter was resident in Jersey (outside EU) and claimed that the legal fees should be made without charging VAT based on the Sch 5 rules. However, HMRC successfully argued that the services were relevant to land and should charge UK VAT because the disputed land was in the UK.
The tribunal chairman sympathised with the taxpayer, not least because HMRC Notice 741 (para 4.7) states that the legal administration of a deceased person's estate which happens to include property is regarded as not land related.However, his conclusion was that 'given that the proceedings were for the perfection of the appellant's title, which is in our view what the proceedings amounted to, it is in our view impossible to say that they did not relate to land'.
