How will new HMRC delegated authority claims handling guidance affect lawyers?

HMRC have issued new guidance on Delegated authority claims handling by Lawyers which may create additional VAT costs.

Many law firms are contracted by insurers to undertake claims handling work when Third Parties have made claims against policy holders by way of defendant delegated authority. HMRC have been conducting a long review of the VAT liability of these contracts, which has created a great deal of uncertainty in the sector. This matter is particularly important as insurers cannot recover the VAT incurred on their costs, and so a saving can be achieved if a law firm’s services are treated as being VAT exempt. 

In an effort to provide clarity on its position (and improve the quality of guidance to affected law firms) HMRC has updated its internal guidance. There is no specified implementation date for these changes and while we hope that HMRC would not seek to apply this change retrospectively we can’t rule that out (this could lead to assessments for underpaid VAT going back four years). Further, we note that these changes may require significant changes to accounting systems so even an immediate prospective change could prove challenging.

The changes are outlined below:

HMRC take the view that there are two distinct stages to the claims handling services provided by law firms: pre-litigation, the stage up until it has been decided to litigate a claim through the courts which HMRC regard as exempt (provided specific conditions are met) and post-litigation, which HMRC regard as taxable.

HMRC regard post-litigation services as taxable for the following reasons:

  • Unlike insurance claims handling services, they can only be provided by regulated law firms.
  • They fall under the regulation of the SRA, as opposed to the pre-litigation services which fall within the FCA regulatory rules applicable to insurance claims handling services.
  • Whilst much of the post-litigation services may be carried out by non-legally qualified claims handlers, unlike pre-litigation work, they must be carried out under the supervision of qualified lawyers.
  • HMRC do not regard it as relevant that most claims that go into the post litigation stage are often settled without the need to go to court. 

In its updated guidance HMRC set out various fee structures and the expected VAT treatment. Most concerning is that where a single fee is charged covering both pre and post-litigation services HMRC state that this fee should be apportioned between the two elements. This is likely to create further uncertainty for law firms and potential disputes with their insurance clients as to how much VAT should be charged. 

HMRC’s revised guidance can be found here.

If you or members of your team would like to discuss the guidance and potential impact please contact one of our local specialists or Ian Carpenter.