A ruling by the European Court of Justice (ECJ) earlier this month (3 March) means that law firms with volume claims-handling operations face a possible hike in VAT bills

The ruling came in an ECJ case concerning Arthur Andersen; it considered the meaning of the phrases ‘insurance agent’ and ‘insurance broker’.

Some law firms provide a claims-handling service in conjunction with insurance litigation services. At the moment, the fees for such services can be exempt from VAT if the case settles.

But as a consequence of the ECJ decision in the Arthur Andersen case, this exemption is now in doubt and the UK’s legislation will probably have to be changed, according to accountancy firm Grant Thornton.

Roger Zair, head of Grant Thornton’s professional practices group, commented: “Firms that are geared up to do this work are faced with the prospect of having to charge VAT to underwriters, who cannot claim it back. This will naturally create pricing pressure and, if insurance companies seek an unchanged real cost from law firms, this will reduce lawyers’ income by the VAT amount.”

Customs and Excise will now carry out a consultation process to determine what legislative amendments are required.

“The ruling is unlikely to be introduced overnight and the process will probably start with a consultation process,” added Zair.