Recoverability of VAT on legal fees

The US government was the plaintiff in proceedings taking place in Washington DC. A costs order on an indemnity basis had been made against them in the UK in relation to costs incurred by a litigation partner in a UK law firm in giving evidence under compulsion (in his capacity of legal adviser to one of the corporate defendants in the proceedings) for use at the US trial. A litigation boutique acting for the US Government sought expert advice in relation to the recoverability by the individual’s firm of UK VAT charged on third party invoices for advice given to him.

In order to decide whether the firm in which the individual was a partner was, in principle, entitled to credit for the input tax on the invoices rendered by the third party, three questions needed to be answered:

1. Who was the supply of legal services made to?

2. Was the recipient of the supply a taxable person?

3. Was the supply used or to be used for the purpose of any business carried on or to be carried on by the recipient?

Ann’s view was that the supplies of legal services were made to the individual qua partner and were ‘used’ by his firm for business purposes. The allegations made against the individual in the proceedings arose out of his solicitor-client relationship with the defendant company and if substantiated would have affected his professional reputation. The individual had obtained immunity for himself and his firm from civil and criminal process arising out of any evidence he might give in the course of his examination in the proceedings so he was not personally at risk in this regard.

It was accepted that there was an element of community of interest between the individual and his client, the defendant company. It was undoubtedly for the purpose of his firm’s business as suppliers of legal services to protect the professional reputation of one of its partners, particularly in a case where this was also serving the interests of one of its clients.

The conclusion was that the VAT charged was, in principle, input tax recoverable by the firm in which the individual was a partner. This conclusion was accepted by the costs judge, with the result that the US government was liable to pay only the VAT exclusive sum pursuant to the costs order. The costs hearing was reported as United States of America v Phillip Morris Inc & Ors [2006] EWHC 90067 (Costs)


At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.