VAT and access to justice

VAT on legal services does not figure at all in public discussion in the UK. It has been a dormant issue for the last few years at European level, too. It only arises again now because the last member state where lawyers were exempt from VAT – Belgium – has finally changed its mind. Its lawyers have now been brought within the VAT fold to raise money for the public purse. But the Belgian legal profession (or at least the French- and German-speaking part of it) has decided not to go quietly, and is challenging the decision through the courts.

You might wonder what the problem is. The Council of Bars and Law Societies of Europe (CCBE) has a position paper from 10 years ago, when the topic was last active, calling for a reduced rate of VAT for legal services provided to an individual, for the benefit of improving access to justice. Obviously, individuals face a 20% tax (21% in Belgium) on bringing or defending cases through a lawyer. The CCBE paper points out that VAT leads to an inequality of arms, since there is an increase in the price of services for VAT-unregistered individuals, whereas VAT is cost-neutral for companies eligible for VAT refunds.

These individual litigants may have no choice but to resort to law to enforce or defend their rights, and yet they face a tax burden for doing so. It is strange that the state recognises the need for financial assistance through legal aid to ensure access to justice on the one hand, but takes it away through blanket VAT charges on the other.

These arguments were rehearsed in the Belgian Parliament during the discussion on the government’s move. It was pointed out that lawyers would themselves now be able to deduct VAT which they paid on other services. On the question of whether individuals should receive exemption from the measure, the government openly said that permitting this would negate the state’s budgetary needs in bringing forward the amendment in the first place (in other words, it was not being submitted as an act of principle but out of a need for cash). However, the wish to bring Belgium into line with other EU member states was also mentioned.

The CCBE position paper and the Belgian challenge both rely on Article 6 of the European Convention on Human Rights, and Article 47 of the Charter of Fundamental Rights of the EU, both of which deal with the right to a fair trial. (The Belgian challenge also rests on a range of issues specific to Belgium, such as articles in its constitution, and the history of VAT on lawyers’ charges in Belgium, which arose out of the Belgian state taking advantage years ago of a standstill provision in EU VAT legislation to allow it to continue to exempt lawyers.)

At the same time as the Belgian challenge, and by coincidence, the European Commission is carrying out a consultation on this area of VAT, called ‘Review of existing VAT legislation on public bodies and tax exemptions in the public interest’. The deadline for replying is 14 February 2014. Although extending the areas of tax exemptions in the public interest is not ruled out (so far I can tell), the whole exercise appears to be undertaken on the assumption that these areas should be reduced or done away with altogether.

Whenever the topic of VAT on lawyers is under discussion, a sceptic always raises the question of practicality. We know that governments need money badly these days as a result of the economic crisis. The last country to introduce VAT on legal services was Greece, which was forced into implementing it by the Troika. Leaving aside the legal arguments to be raised in Belgium, the sceptic asks whether it is realistic to expect a new exemption or reduced rate for individuals to be introduced by other countries which have implemented full VAT on legal services for decades.

The Belgian challenge is interesting for two reasons. First, it raises from its long sleep the principle of the impact of VAT on access to justice. Second, it gives occasion for arguments around the principle to be aired at the highest level in the courts. UK lawyers have proved to be sceptics in the past – will they or the Belgian legal profession win this round?

Jonathan Goldsmith is secretary general of the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs