UK LAWYERS' fees are set to be the highest - and therefore least competitive - in Europe after confirmation in Luxembourg of the UK government's policy of taxing lawyers' fees.
The European legal decision means that non-recoverable VAT on the bills of lawyers, accountants, and corporate finance advisers are likely to be a permanent burden for British plcs struggling to compete with their European Union counterparts, warns City firm Simmons & Simmons.
Millions of pounds worth of VAT, which companies have delayed paying until a ruling from Europe, could now be irrecoverable.
As a result UK companies could now face having to pay 17.5 per cent more for their City advisers than other EU companies.
The concern is over a long-awaited opinion from the Advocate General in the European Court of Justice. The case, which is under close scrutiny by City firms, is a long-running battle between British company BLP Group and the Commissioners of Customs & Excise.
If the European Court agrees with the opinion then, unlike elsewhere in the EU, VAT on professional fees will be irrecoverable and so will add to the cost of corporate finance expenses in this country.
UK City lawyers could also lose out in cross-border deals, where a client company with operations on the contintent may choose to use legal advice in another EU state where VAT is recoverable.
Stephen Coleclough, a tax partner at Simmons & Simmons and handling the case with partner Tony Woodgate, says: "It will have an impact for the clients. It harms them by making them less competitive.
Although VAT was introduced in 1973, Customs & Excise has only been looking closely at the issue of recoverability on fees since around 1989, around the time when BLP made a disposal.
The type of deals affected, says Coleclough, appear to be sale of subsidiaries, issues of bonds and equities, and sale of surplus land - all 'big ticket' areas where large amounts of money are involved.