Direction of supplies: Payment of another party’s legal costs

Hi all, As the thread title suggests, I have a query on VAT payment by a third party on our bill of costs, under the below guidance. "If the solicitor’s client is a registered fully taxable person, and the supply of legal services is obtained for the purpose of the client’s business, the client will be entitled to an input tax credit in which case the indemnifying party need only pay the costs exclusive of VAT" I work for a firm of Solicitors and part of our service is to recover debts for our clients who are VAT registered. Our bill of costs is payable by the debtor/third party, whom we have recovered the debt from. As I understand it, they only need to pay the net aspect of our bill and not the VAT. That then poses the question of who pays the VAT to clear the bill on our system? Do we send the bill to our client to pay the VAT element so they can claim it back and then we ask the debtor to purely pay the fees aspect? Thanks in advance for any help.

Hi. You are referring to the guidance below: VAT Supply and Consideration  . Under these cicumstances where the client is a fully taxable the client will be allowed to recover the VAT charged to them. Hence you will bill the third party net of VAT and bill the client the VAT element which they should then be allowed to recclaim on their VAT return  . Thank you .

Hi there, Thank you for the detailed reply of which was most helpful. For this particular type of work, the debtor/third party has a recovery clause in their lease that says they are fully responsible for all legal costs in the recovery action of unpaid service charges. Would this contractual clause cover the VAT on our bill, or would they still be responsible for only paying the net amount of our professional charges? Thanks in advance.

Hi,
We would say that the guidance would still stand in this scenario:
VATSC11534 - Supply: Direction of supplies: Payment of another party’s legal costs: Agreement with the Law Society's Revenue Law Committee on VAT in respect of third party cost payments
This would mean that the debtor would only be responsible for paying the net amount of your professional fees and your client would be able to recover the VAT element of this if they are a fully taxable business.
Thank you.