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A European Court has ruled that VAT on UK corporate lawyers' fees cannot be recovered.
The judgement supports the view of HM Customs & Excise which, since 1989, has meant UK businesses pay 17.5 per cent more for their lawyers than their European counterparts. It was made despite the fact that most continental countries have allowed full recovery of VAT charged on such fees.
It also dashes the hopes of many corporations withholding millions of pounds in unpaid VAT prior to the ruling which will now have to pay up (The Lawyer 7 February).
Paul Hale, Simmons & Simmons tax partner, says: "The judgement means a UK company entering into certain corporate finance transactions will incur unrecoverable VAT on its lawyers' and other advisers' fees.
"The practice in other European jurisdictions is different, and that puts the City and companies in UK Plc at a slight competitive disadvantage."
However, the ruling should apply to all member states, based as it is on interpretation of the first and sixth VAT directives which created a common VAT system throughout Europe, says Hale.
The court's ruling was on a case brought by UK firm BLP Group. It relates to advice taken by BLP on the sale of shares in 1989. Simmons & Simmons acted for BLP in Europe.
Greg Sinfield, Lovell White Durrant VAT partner, says: "UK companies will have to pay more, but this shouldn't effect competitiveness for advisers if other European states are put in the same position.
"If other member states refuse to implement this, UK companies may consider lobbying the European Commission to change Article 17 of the sixth VAT directive to allow recovery."