VAT Tax Point and Time of Supply for Law Firm Billing

Why the Tax Point Matters for Law Firms

Output VAT on legal fees is due for the VAT period in which the tax point (the time of supply) falls. It is not due when the firm decides to put it on a return, nor automatically when the client pays. For a single, completed piece of work the tax point is usually obvious. For a law firm it frequently is not, because firms bill in ways that complicate the timing: interim requests for payment on account during a long matter, interim statute bills, money taken into client account, and rolling retainers.

Legal services are standard-rated for VAT at 20% (a rate in force since 4 January 2011), and this page assumes that VAT applies. The question here is purely about timing: in which VAT period does the output VAT become due? Get the timing wrong and the firm either accounts for VAT too early (an avoidable cash-flow cost, paying HMRC before the client has paid the firm) or too late (exposure to penalties and interest). The headline, and the point most likely to be misunderstood in a law firm, is the distinction between a request for payment and a statute bill, which we come to below after setting out the statutory framework.

The Basic Tax Point for Services (VATA 1994 s.6)

The governing provision is VATA 1994 s.6, which sets the time of supply. For services, the basic tax point under s.6(3) is the time when the services are performed. In practice, for a discrete, completed service that means the point at which the work is finished and the firm has done what it agreed to do.

The basic tax point is the default, but it is frequently displaced. Two mechanisms can move the tax point: an earlier invoice or payment can bring it forward (s.6(4)), and the 14-day rule can fix it at the invoice date where a VAT invoice follows shortly after performance (s.6(5)). Both are dealt with next, and both matter for the way law firms bill.

It is worth being precise about what "performed" means for legal work, because it is rarely a single instant. For a discrete task (drafting a will, completing a conveyance, settling a single piece of advice) performance is the point the work is delivered. For a long matter that runs for months or years, there is no single moment of performance until the matter concludes, which is exactly why firms reach for interim billing in the first place. The statutory scheme accommodates this: the basic tax point may sit a long way off at the end of the matter, but the actual tax point and the 14-day rule, together with the continuous-supply treatment discussed below, bring the VAT to account in sensible instalments as the firm invoices or is paid along the way. The basic tax point is therefore the backstop, not usually the operative date for a law firm's interim billing.

The Actual Tax Point: Invoice or Payment, Whichever Is Earlier

Under s.6(4), if before the basic tax point the firm either issues a VAT invoice in respect of the supply or receives a payment in respect of it, the supply is treated, to the extent covered by that invoice or payment, as taking place at the time the invoice is issued or the payment is received. In short, an early VAT invoice or an advance payment pulls the tax point forward, but only to the extent of the amount invoiced or paid.

This is why taking money on account can matter. A payment received in respect of the supply creates a tax point on the sum received. The careful word is "in respect of": a genuine payment for the work crystallises the tax point, whereas funds requested and held in client account against a document that is not a VAT invoice behave differently, as the next sections explain. The earlier of invoice or payment is the practical trigger to watch for most one-off matters.

The 14-Day Rule

Under s.6(5), if the firm issues a VAT invoice within 14 days after the basic tax point, the tax point becomes the date the invoice is issued (to the extent it is not already fixed earlier by s.6(4)), unless the firm has notified HMRC in writing that it elects not to use this rule. HMRC can also allow a period longer than 14 days by agreement, which some businesses arrange to align tax points with billing cycles.

For a firm that completes a piece of work and bills it within a fortnight, the 14-day rule means the tax point is simply the invoice date, which is administratively convenient and keeps the tax point aligned with the firm's own records. The rule should be applied consistently, and a firm that wants to disapply it must make the written election.

The Solicitor-Specific Point: Request for Payment Versus VAT Invoice

This is the load-bearing distinction, and it is specific to the way law firms bill. A request for payment, or request for payment on account, is a request for funds made before the firm is ready to deliver a VAT invoice or a statute bill. Under long-established Law Society practice, read together with the s.6 time-of-supply rules and VAT Notice 700, a request for payment is not a VAT invoice. It should be marked clearly as a request for payment and must not be presented as a tax invoice. Because it is not a VAT invoice, issuing it does not create a tax point, and no output VAT is due simply because the request has gone out.

The tax point on that work arises later: when the firm issues its VAT invoice or statute bill, or when it receives the payment in respect of the supply, whichever is earlier. The precise point to hold onto is that it is the receipt of payment against a request for payment that triggers the tax point on the sum received, not the issue of the request itself. So a request for payment defers the VAT until the firm invoices or is actually paid.

Contrast this with an interim statute bill. A statute bill is a self-contained bill for the work it covers under the Solicitors Act 1974: it is a demand for a defined sum that the client can be sued on, and it starts the client's assessment and limitation clock. Because it is a demand for a defined sum and typically functions as a VAT invoice, an interim statute bill does create a tax point on its date (subject to the 14-day rule if a separate VAT invoice follows). The output VAT is then due for that VAT period, whether or not the client has yet paid. The same Solicitors Act distinction that determines when the client's clock starts also determines when the firm's VAT becomes due.

The practical reason this distinction is so easy to get wrong is that the two documents can look almost identical to a busy fee-earner: both ask the client for money, both quote a figure, both may show VAT. The difference is legal substance, not layout. A request for payment is a request for funds in advance, with the firm reserving the right to render its actual bill later; it is not, and must not look like, a definitive tax invoice. A statute bill is the firm's definitive demand for the costs of the work it covers, complete in itself, which is why the client can be sued on it and why it starts the assessment clock. When a firm decides which to issue, it is also (whether it realises it or not) deciding when its VAT falls due. Aligning the billing template and the bookkeeping treatment to that decision is the heart of getting the timing right.

There is a corollary worth stating plainly for firms that bill conservatively. A firm that issues genuine requests for payment during a matter, and only renders statute bills at sensible milestones, defers its output VAT to those milestones (or to the dates it receives payment, if earlier). A firm that, by contrast, issues VAT invoices for every interim demand brings its output VAT to account earlier, sometimes well before the client pays, which is a real cash-flow cost. Neither approach is wrong, but they have different VAT-timing consequences, and a firm should choose its interim-billing convention deliberately rather than by accident of template wording.

Money on Account and Client Account

The interim-billing point ties directly to the client-money rules. Money taken on account of costs and held in client account is not yet the firm's money; it belongs to the client until the firm is entitled to it. If that money was requested under a genuine request for payment on account (not a VAT invoice), holding it does not of itself create a tax point. The tax point arises when the funds are applied to a bill, or when the firm issues a VAT invoice, or otherwise when payment in respect of the supply is received.

Care is needed at the moment the firm becomes entitled to the funds. Once the firm renders a bill and transfers money from client account to office account in satisfaction of that bill, the tax point on the bill applies and the output VAT is due for the relevant period. For the underlying client-money mechanics, our guide to client money accounting for solicitors sets out how funds move between client and office account, which is the practical backdrop to getting the VAT timing right.

Continuous Supply of Services

Not every matter is a single completed service. Ongoing retainers and staged commercial work are typically continuous supplies of services. For continuous supplies the tax point is driven by the earlier of the issue of a VAT invoice or the receipt of a payment (the continuous-supply rule in the VAT Regulations 1995, reflected in VAT Notice 700). So on a rolling monthly retainer, each invoice raised or payment received crystallises a tax point for the amount it covers.

This is a different default from the basic tax point that governs a discrete piece of work, and it is the more useful frame for firms billing monthly fixed fees or working through staged commercial instructions. The practical consequence is clean: with a continuous supply, the firm accounts for output VAT period by period as it invoices or is paid, rather than waiting for some single moment of completion that may never neatly arrive.

Work Spanning a VAT Rate Change

If the standard rate of VAT changes while a matter is in progress, the supplier has a choice. It can account by reference to the basic tax point (the work actually performed) for the parts of the supply falling before and after the change, even where the actual tax point (the invoice or payment) falls on the other side of the change. VAT Notice 700 sets out these change-of-rate options.

The standard rate has been 20% since 4 January 2011, so for most firms this is a planning point for if and when the rate ever changes, rather than a current concern. It is most relevant to long or staged matters, where work straddling a rate change could otherwise be taxed at the wrong rate if the firm simply followed the invoice or payment date. Firms running multi-year instructions should keep the option in mind so that, should the rate move, they can apportion correctly by reference to when the work was done.

Work Spanning the Firm's VAT Registration Date

Only supplies with a tax point on or after the firm's effective date of registration bear VAT. For a long matter that began before registration and continues after it, the s.6 tax point rules decide which fees fall on which side of the line: the basic tax point (work performed), any earlier invoice or payment, and the 14-day rule together determine the date.

This is a real issue for newly registered firms, for example a firm that has just crossed the £90,000 registration threshold (the threshold in force from 1 April 2024). Such a firm should map its in-progress matters against the registration date, identify which fees have a tax point on or after that date, and account for VAT only on those. Our guide to VAT registration for solicitors covers the registration trigger itself; the tax point rules here are what then decide the timing of VAT on work that straddles the date.

The practical trap at registration is the work that was substantially done before the effective date but billed afterwards. If the firm issues its bill (or a VAT invoice) after registration, or receives payment after registration, and that creates the tax point, VAT is generally due even though much of the work predates registration. Conversely, a firm cannot recover output VAT it never charged on a pre-registration tax point simply because it billed late. The disciplined approach is to fix the effective date of registration, then walk each live matter through the s.6 sequence (basic tax point, earlier invoice or payment, 14-day rule) to place each fee on the correct side of the line. Where a firm has discretion over exactly when it bills work straddling the date, the tax point rules also tell it how that timing affects whether VAT applies.

Worked Example: Request for Payment, Then Statute Bill

The following is an illustrative sketch of the timing, not advice, and the figures are invented.

A firm is running a long litigation matter. Three months in, it sends the client a request for payment on account of, say, £6,000 plus a note that VAT will be accounted for on billing, asking the client to put funds into client account. Because the request is not a VAT invoice, no tax point arises when it is issued, and no output VAT is due for that period merely because the request went out. If the client pays the £6,000 into client account against that request, the firm should consider whether that receipt is a payment in respect of the supply; where it is a genuine payment on account of costs held in client account against a request that is not a VAT invoice, the firm defers the VAT until it applies the funds to a bill or issues a VAT invoice.

Some months later the firm renders an interim statute bill for the work done to date, a defined and suable sum. That bill creates a tax point on its date (or, if a separate VAT invoice follows within 14 days, on the invoice date under s.6(5)). The firm now accounts for the output VAT on that bill for the VAT period in which the tax point falls, even if the client has not yet paid the balance. At that point the funds previously held on account can be applied to the bill.

The lesson: the request for payment deferred the VAT, and the statute bill brought it forward into a defined period. Knowing which document does which is the difference between accounting for VAT at the right time and either paying it early or paying it late.

Practical Compliance Checklist

• Mark interim demands clearly as a request for payment, not a VAT invoice or tax invoice, where you intend to defer the tax point.
• Account for output VAT when a VAT invoice or statute bill is issued, or payment is received, whichever is first. Do not default to "when the client pays" unless you are on cash accounting.
• Apply the 14-day rule consistently, and make the written election to HMRC only if you genuinely want to disapply it.
• Treat each invoice or payment as a tax point on a retainer (continuous supply), accounting for VAT period by period.
• Reconcile every tax point to the correct VAT return period, so output VAT lands in the right quarter.
• Mind cash accounting. Under the cash accounting scheme the tax point for output VAT effectively follows receipt of payment, which can ease cash flow; outside it, the s.6 rules apply and VAT can fall due before the client pays.

For the wider VAT framework, see our guides to VAT on legal services and whether UK solicitors charge VAT, and for the day-to-day mechanics our solicitor VAT accounting guide. Two related questions sit alongside the tax point: whether exempt interest income affects your recovery, covered in our guide to partial exemption and client account interest, and the VAT treatment of premises, covered in our guide to the option to tax and the Capital Goods Scheme.

Speak to a Specialist

The tax point is one of those rules that looks technical and turns out to be intensely practical: it decides which VAT quarter your fees land in, and getting it wrong costs the firm either in cash flow or in penalties. For most firms the discipline is simple once the request-for-payment-versus-statute-bill distinction is understood and the 14-day rule is applied consistently. If your firm uses interim billing, runs long matters, has just registered for VAT, or is reviewing how it accounts for output VAT, speak to a legal-sector-specialist accountant who can align your billing process with the s.6 rules and make sure VAT is accounted for in the right period.