A time to reconsider VAT on legal services

The cost of living crisis is everywhere.

The chancellor was under pressure a few weeks back to remove VAT on fuel and other items to help the poorest. But eventually no changes to VAT were made in the spring statement, apart from a reduction for home installations of energy-saving measures.

But here is an idea for lawyers to consider. For years, our continental colleagues have been agitating for VAT to be reduced or removed altogether for legal services, to improve access to justice. UK lawyers – while we were still part of the EU - tended to be on the sceptical side, privately pouring scorn on the notion that a tax which had been levied for years would ever be reduced or removed. Indeed, the arguments seemed to be moving in the other direction, as both Belgium and Greece, which had not imposed VAT on legal services, came into the fold following the 2007-2008 financial crisis.

But the EU has, unbelievably, signalled a change of heart. At the very end of last year, the EU Council released a proposal for a draft directive (FISC 237, ECOFIN 1214), allowing for greater flexibility in choosing areas where lower VAT rates might be able to be applied. There is a relatively long list of items, but the member states are restricted as to how many they can choose from the list.

The reasoning is that suppliers derive no significant benefit from being established in a lower-rate member state under a system where the supply of goods and services is taxed in the member state of destination. Consequently, greater diversity in VAT rates causes no disruption to the working of the single market, nor distortions in competition, and so greater flexibility can be introduced.

Tucked away in clause 27 of the third annex, a group of words is proposed as an addition to existing EU law (Directive 2006/112/EC), giving member states the choice as to whether to apply lower rates of VAT as from 1 January 2025 to the following services, among others:

‘Legal services supplied to people under a work contract and unemployed people in labour court proceedings, and legal services supplied under the legal aid scheme, as defined by Member States’.

This is an enormous admission of principle, which we would do well to consider in the UK. It is a very restricted admission, confined to employment law proceedings and legal aid services. But if the thinking is that these consumers of legal services should not pay VAT, the evident principle can be applied elsewhere.

The argument in favour of reduced or exempt VAT on legal services has always been about equality of arms and access to justice.

The equality of arms point arises because individuals not registered for VAT face an increase in the price of services through the tax, whereas VAT is cost-neutral for companies eligible for VAT refunds. So an unregistered individual, whether plaintiff or defendant, faces an unequal financial playing field when pitted against a VAT-registered entity or public authority.

Legal action is not always a matter of choice. A private individual may have no option other than to take professional advice or institute legal proceedings against a public authority or a VAT-registered entity, leading to unfairness. The Court of Justice of the European Union has already found that:

‘The principle of equality of arms, which is a corollary of the very concept of a fair hearing … implies that each party must be afforded a reasonable opportunity to present his case, including his evidence, under conditions that do not place him at a substantial disadvantage vis-à-vis his opponent.’

Regarding access to justice, the cost of living crisis puts this in an even sharper context. The right of access to justice should not be taxed, or at any rate not so heavily taxed - it is a basic right like health services.

Of course, European lawyers, seizing on the concession of principle made in the draft directive, are likely to demand that it should be extended to other categories of legal services, especially those provided to private individuals, and should include legal advice, support in legal proceedings and in ADR. They are right to do so.

We have obviously left the EU. Without wishing to resuscitate any of the old arguments, one of the reasons given by Brexit proponents was that it would give greater flexibility and allow us to do things better, including in areas like VAT.

Well, here is a great opportunity. The EU is proposing a very welcome, although limited, breach in the general application of VAT to legal services. Maybe we should take advantage of this precedent to lobby our government to act similarly within the UK, and indeed go further. The cost of living crisis gives added urgency to the question.

Jonathan Goldsmith is Law Society Council member for EU & international and a former secretary general of the Council of Bars and Law Societies of Europe. All views expressed are personal and are not made in his capacity as a Law Society Council member, nor on behalf of the Law Society