How Do Solicitors Handle VAT on Counsel Fees

Introduction

When solicitors instruct counsel (a barrister) on behalf of a client, VAT may be charged on counsel’s fees depending on the barrister’s VAT status. Solicitors then pay the barrister’s invoice and usually recover the cost from their client.

The key question is whether the solicitor should charge VAT again on counsel’s fees when invoicing the client. The answer depends on whether the solicitor acts as a principal or an agent in the transaction. Understanding this distinction is essential for both VAT compliance and correct client accounting.

The solicitor as principal or agent

When dealing with counsel fees, solicitors can act in one of two ways:

As principal The solicitor commissions and pays for counsel’s services as part of their own legal services to the client. The solicitor is the customer of counsel and then recharges the fee to the client.

As agent The solicitor merely arranges for counsel’s services on behalf of the client, who is the true recipient of the service.

This distinction determines whether VAT is charged when passing on the cost to the client.

Acting as principal

When the solicitor acts as the principal, they are responsible for paying counsel’s VAT-inclusive fee and then recharging the total cost to the client as part of their own service.

In this case, the solicitor must charge VAT on the entire amount, even though the barrister already charged VAT on their own invoice. The VAT is not being charged twice in substance, because the solicitor can reclaim the VAT paid to the barrister as input tax and charge VAT on the total bill to the client as output tax.

This is the most common situation in solicitor counsel relationships, especially when the solicitor receives counsel’s fee note directly and pays it from the client account or office account.

Acting as agent

If the solicitor clearly acts as an agent and simply pays counsel’s fee on the client’s behalf, the payment may qualify as a disbursement for VAT purposes.

To treat the cost as a disbursement (and therefore exclude it from VAT when invoicing the client), all of HMRC’s disbursement conditions must be met. These include:

The client, not the solicitor, received the barrister’s service.

The solicitor acted as an agent authorised by the client.

The cost was paid to the barrister on behalf of the client.

The cost is passed to the client exactly as invoiced, with no markup.

The payment is separately itemised on the solicitor’s invoice.

If these conditions are satisfied, the solicitor does not charge VAT when recharging the counsel fee. However, the solicitor also cannot reclaim the VAT from the barrister’s invoice as input tax, because it belongs to the client, not the solicitor.

How the process works in practice

Step 1: Counsel issues a fee note

When counsel completes their work, they issue a fee note to the instructing solicitor. The note may include VAT if counsel is VAT registered.

If the solicitor acts as the principal, they record the VAT on this fee note as input VAT in their accounts and can reclaim it on their next VAT return.

Step 2: Payment of counsel’s fee

The solicitor usually pays counsel’s fee either from:

The client account, if client funds are held on account of costs.

The office account, if the solicitor has already billed the client for the fees.

Under the SRA Accounts Rules, solicitors must only transfer client money to the office account once an invoice has been raised for the work performed.

Step 3: Recharging the client

The solicitor then invoices the client.

If acting as principal, the solicitor includes counsel’s fee (plus VAT) in their own bill and applies VAT to the full amount.

If acting as agent, the solicitor lists counsel’s fee as a disbursement, passed on at cost, with no VAT added.

Example

A barrister charges £1,000 plus £200 VAT to a solicitor.

If the solicitor acts as principal:

The solicitor pays £1,200 to the barrister and reclaims £200 input VAT.

The solicitor invoices the client £1,200 plus £240 VAT (20 percent), totalling £1,440.

The solicitor accounts for £240 as output VAT to HMRC.

If the solicitor acts as agent:

The solicitor pays £1,200 to the barrister and recharges the same amount to the client as a disbursement, with no VAT added.

The solicitor does not reclaim or charge any VAT on this payment.

Determining whether to act as principal or agent

In most cases, solicitors are treated as principals because they engage counsel as part of providing a complete legal service. The client pays for the solicitor’s advice, which may include work delegated to barristers, experts, or other professionals.

Acting as an agent is less common and requires clear evidence that the client is the true recipient of counsel’s services. Typically, this applies only when:

The barrister’s advice or opinion is provided directly to the client.

The client has authorised the solicitor to pay the fee purely for convenience.

The barrister invoices the client via the solicitor, but the solicitor does not use the work to provide their own advice.

Firms should document the arrangement in the client care letter or terms of engagement to clarify who is receiving counsel’s services and who is responsible for VAT.

Interaction with SRA Accounts Rules

Solicitors must comply with the SRA Accounts Rules when handling client money for counsel’s fees.

If the solicitor holds funds in the client account on account of costs, they can use those funds to pay counsel only after the client has been invoiced for the amount. Until that point, the money remains client money.

Firms must also ensure that payments to counsel are recorded properly in both the client ledger and office ledger. Mixing client and office money or transferring funds before billing breaches the SRA rules and could trigger disciplinary action.

Record keeping and documentation

To stay compliant with VAT and SRA requirements, solicitors should:

Keep a copy of counsel’s fee note showing VAT charged.

Record whether counsel’s fee was treated as a disbursement or expense.

Retain evidence of the client’s authorisation to pay counsel on their behalf.

Itemise counsel’s fees clearly on client invoices.

Maintain full audit trails for payments made from client or office accounts.

Accurate record keeping ensures that input VAT is reclaimed only when appropriate and helps HMRC or the SRA verify that funds were handled correctly.

Common mistakes to avoid

Treating counsel’s fees as disbursements when acting as principal.

Reclaiming input VAT when the fee belongs to the client.

Failing to charge VAT on counsel’s fees when required.

Moving client funds to the office account before issuing an invoice.

Including disbursements in VAT returns when no VAT is due.

Regular internal training and reviews can help prevent these errors and ensure both VAT and SRA compliance.

Example scenario

A law firm instructs a barrister to represent a client in court. The barrister issues a fee note for £3,000 plus £600 VAT. The solicitor pays the barrister from client funds and issues an invoice to the client for £3,600 plus their own £2,000 in legal fees, making a total of £5,600 plus £1,120 VAT.

Because the solicitor acted as principal and integrated counsel’s work into their own legal service, VAT is applied to the total bill. The solicitor reclaims the £600 VAT from the barrister’s invoice as input tax.

Conclusion

Solicitors must handle VAT on counsel fees carefully, as the correct treatment depends on whether they act as principal or agent. In most cases, solicitors act as principals, meaning they must charge VAT to clients and can reclaim VAT paid to counsel. If acting purely as agents, they pass on counsel’s fees as disbursements without VAT.

Clear communication with clients, accurate record keeping, and strict adherence to SRA Accounts Rules are essential to avoid VAT errors and maintain compliance. When in doubt, it is always best to seek advice from a VAT specialist or legal accountant familiar with professional services taxation.