I believe that the VAT arrangement between HSBC and the solicitors needs to be investigated by an expert. It seems very strange to me that the debtor is unwittingly paying the bank’s VAT. The 16.4% added to the debt is a 14% fee for the solicitors with VAT at 17.5% added, which equals 16.4%. If the debtor pays the debt or any portion of it, the solicitors raise a pro-forma invoice to the bank, the invoice having been paid in full. The debtor doesn’t know s/he is paying VAT for a service they don’t receive and my understanding is that if a paying party is ordered to pay the other party’s costs, VAT is not payable.
This is an extract from HMRC website on the subject:
The Indemnity principle
The Law Society Gazette article of October 1990 stated that when a person other than the solicitor’s own client is paying the solicitor’s costs, the liability of the paying party is one of indemnity only, and thus in itself outside the scope of VAT. In fact, such payment will only be regarded as outside the scope in certain circumstances, for example, as follows:
- where following completion of litigation (or arbitration), one party is ordered to pay the other party’s costs;
- where a party to a transaction undertakes to pay the other party’s costs, and the matter does not proceed to completion, so the costs are “abortive”.
I would like to have this explained by an expert. I understand that banks cannot reclaim VAT because their services are VAT exempt.