The VAT treatment of party and party costs in litigation has been a cause of confusion to some practitioners.

This practice note is designed, without setting out the statutory references, to outline the VAT position via bullet points.

• Plaintiff (P) v Defendant (D).
• P successful in action.
• P recovering costs from D.
• D to pay same to P.
• P’s solicitor should issue VAT invoice for services supplied to P, and accounts to Revenue for VAT on fees invoiced to P.
• D’s solicitor should issue VAT invoice for services supplied to D, and accounts to Revenue for VAT on fees invoiced to P.
• Assuming P is registered for VAT, and the costs incurred by P relate to his VATable business, P is entitled to recover this VAT.
• P should pay the VAT invoiced to him to his solicitor and recover same in his VAT return.
• D must cover the VAT exclusive cost to P on the basis that this is the actual cost to P, as P can recover the VAT on these costs from Revenue.
• P’s solicitor gets paid the VAT on his/her fees by P and remits same to Revenue in the normal way.
• However, just because P is registered for VAT does not automatically mean P is entitled to recover all or any of the VAT on to his solicitor’s fees.
• The costs must relate to a VATable business activity for P to be entitled to deduct same.
• If P is not entitled to deduct VAT on such costs, then the VAT thereon is a cost to P and should be recoverable from D, to be paid over to P’s solicitor as part of the costs.
• P’s solicitor should clarify with his/her client the position as regards the recoverability of VAT on costs by his/her client.
• The Revenue Commissioners have commented as follows: “A practising solicitor is remunerated from two sources only, that is, either by his own client under contract or by legal aid under statute. If by agreement or court order one side bears the other side’s costs, the sum involved is a financial transaction between the parties and it is not liable to VAT. The ‘winning’ solicitor will issue, in the normal way, an invoice to his own client for the value of his services and the ‘losing’ solicitor will do likewise in relation to his client. If both clients are registered for VAT and the action concerned a business matter, for example, a disputed trade debt, each client may claim input VAT invoiced to him on his solicitor’s services. The winner’s solicitor will have performed no service whatever for the loser and there can be no question of the loser claiming on his VAT returns for VAT other than that correctly invoiced to him. If the ‘winning’ client is registered for VAT purposes and his solicitor’s services are supplied for business purposes, he will be able to claim the VAT payable to his solicitor and, in this event, there should be no recovery of this VAT from the losing side. It is a matter for the losing or paying party to raise the query whether or not the winner is correctly seeking VAT recovery, and Revenue staff should stand aside from any disputes of this nature.”
• “If by agreement or court order one side bears the other side’s costs, the sum involved is a financial transaction between the parties and it is not liable to VAT” that is, the payment by D to P of P’s costs is seen by Revenue as a financial transaction, and P will not charge VAT to D on same.
• It does not mean the services supplied by P’s solicitors are not liable to VAT.
• If D is indemnified by an insurer for P’s costs, the position remains as outlined above.
• Where a person is indemnified under a policy of insurance in respect of any amount payable in respect of services of a solicitor, those services are deemed for the purposes of VAT legislation to be supplied to such person and not the insurer.
• It might be noted that, in the context of business litigation, if a business has ceased prior to incurring costs that were related to the business and the business was entitled to full VAT recovery, VAT on such costs may be recovered in the normal way, notwithstanding that the business has ceased.

The above summary is perhaps best illustrated by an example. Take the scenario of P v D, where P is successful, is awarded costs, and D is covered by an insurer including indemnity for D’s legal costs. The insurer instructs the solicitors who act for D. P is entitled to recover VAT in full on his legal costs. In this scenario, P’s solicitor issues a VAT invoice to P and accounts for VAT on same. P recovers the VAT on this invoice. Thus the net cost to P is the VAT exclusive amount invoiced by P’s solicitor. The solicitor instructed by the insurer issues a VAT invoice to D, not to the insurer, and accounts for VAT on same. VAT recovery by D depends on whether the expense relates to D’s VATable activities or not. P recovers his net costs from D/D’s insurer. The payment of this amount by D/D’s insurer to P has no VAT consequences.