FX is for many shrouded in mystery created by tales of currency speculation with millions won and lost in seconds by international speculators. For ordinary mortals, including legal professional firms, there are limited options with known costs offered by regulated intermediaries. FX need not, and arguably should never be, a matter of uncertainty or speculation for legal professionals.
Intellectual Property – inherently international
Patent and Trademark firms commonly make payments overseas on behalf of clients. These include paying fees of other professional firms; another example would be official fees charged by national patent offices where, for example, a patent renewal fee is paid direct.
Converting Sterling to pay an invoice in another currency inevitably incurs a foreign exchange (FX) charge from the intermediary, usually a firm’s bank, making the payment. Fortunately, many firms are in a position to secure favourable FX rates from their banks based on volume and pass on the benefits to their clients. The FX cost incurred is reflected in the Sterling amount required to cover each payment; an amount that can be invoiced to the client in the usual way.
Disbursement or profit costs – importantly different
A disbursement is generally understood to be a cost that a firm incurs and pays on behalf of a client. Profit costs, on the other hand, are charges made by a firm for its services. Each involves different obligations in relation to information to be provided to clients, and in relation to VAT.
Arranging payment of foreign agent fees could be considered a service that involves a firm’s time and resources and for which a firm might seek fees. If it does, in the UK at least, professional conduct regulations impose obligations to make clear to the client how those charges will be formulated and what actual charges are likely to be.
If a foreign agent invoice is paid on a given date, the FX transaction also takes place on that date. If a firm invoices a client in advance of payment, seeking money on account of expected costs, then the FX rate applied will be the applicable rate on the date of invoice. Once the costs in question have been paid, any shortfall can be recovered by issuing a further invoice; equally, if there has been an overpayment it can be returned to the client by way of a credit note.
Terms and Conditions – how some leading firms deal with FX
I was able to search for and download examples of Terms and Conditions from three leading IP firms in the UK that include specific provisions with regard to FX allowing the relevant firm to charge over and above actual FX costs.
In paragraph 6.2 of this firm’s Terms and Conditions is stated:
“(d)Where we incur charges in foreign currencies (i.e. not Sterling) or where we agree to bill you in a foreign currency, we will apply an exchange conversion rate which is based on the spot rate at the time of billing but which includes a margin to cover our conversion costs and currency risk.”
This language appears to refer to a situation where the firm has to bill before a cost is incurred. The reference to ‘spot rate’ is simply to the FX rate that the bank would have charged for the required amount of currency on the relevant date. What is not clear, to me at least, is what currency risk arises and why the firm needs to charge a margin. As already mentioned, all the firm need do is submit a further invoice for any shortfall or a credit note for any overpayment.
In paragraph 6 of this firm’s Terms and Conditions, under the heading ‘Expenses’, is stated:
“Where disbursements are incurred in a currency other than sterling, we will apply an additional amount to reflect the cost of dealing in the foreign currency.”
If the cost of ‘dealing in the foreign currency’ is the actual cost incurred by the firm and no more, it forms part of the disbursement. If, however, the firm were to apply ‘an additional amount’ that goes beyond the actual cost incurred then such charges would be profit costs.
In paragraph 6.5 of this firm’s Terms and Conditions is stated:
“Expenses and disbursements such as postage and packaging, courier costs, telephone call charges, faxes, photocopying and the charges (if any) paid or to be paid by us to third parties on your or the Client's behalf (such as registration or renewal fees to be paid to the trade mark or patent offices, or the charges of overseas patent or trade mark attorneys) will be invoiced in addition to the fees and will be subject to a handling charge.”
Again, this provision clearly deals with disbursements and yet there is reference to ‘a handling charge’ (that would be profit costs) but with no specifics as to what the amount will be or how it will be calculated.
In a later paragraph 7.2 is stated:
“All sums payable hereunder will be invoiced and paid in pounds sterling unless alternative arrangements have been agreed. Invoices levied in any other currency will be converted at a premium to the prevailing exchange rate. All invoices shall be paid on receipt.”
Under this provision, the firm is entitled to charge ‘a premium’ on the FX rate. This presumably arises because the firm does not know when its invoice will be paid and so includes a margin to cover the risk that the FX rate moves against the firm so that when payment is converted to Sterling the amount received is less than expected. In such a situation, it is always open to the firm to invoice for any shortfall or credit any overpayment. If, however, some or all of the ‘premium’ is retained by the firm, those charges would constitute profit costs.
Don’t forget the VAT!
If FX-related charges are not disbursements, then they are profit costs and therefore must be subject to VAT. What is not allowed, as I understand it, is to add a premium or ‘handling charge’ or other FX-related overhead or service cost to a disbursement. There is no VAT charged on disbursements; anything else, including recovering overheads, is subject to VAT and must be accounted for as such. This subject is covered in detail in a very helpful article published by the Lawyers Defence Group which includes the following:
“For the purposes of VAT, charges which are not proper disbursements must of necessity be profit costs and as such subject to a charge to VAT. Thus, even if you choose to list them separately, then you should, if you are registered for VAT, be charging VAT on them.
You may, therefore, from a VAT perspective, need to separate out those charges which you make which are recovering overheads from those which are genuinely disbursements.”
HMRC guidance in relation to invoicing in foreign currencies and VAT can be found here.
Telegraphic transfers – Solicitors Disciplinary Tribunal ruling
In a practice note produced by the Law Society as a result of a Solicitors Disciplinary Tribunal (SDT) ruling in a case* involving a firm charging more than the actual cost to them of telegraphic transfers (the respondents were fined), is stated:
“A TT fee is an expense but some practices charge more than the cost of the transfer under the heading disbursement, thereby concealing profit costs from clients.
The SDT has found that this clearly breaches rule 1 of the code of conduct, particularly in relation to the solicitor's duty to act with integrity and in the best interests of the client.
This conduct is also likely to be in breach of rule 2, client care, if any amount over the cost of the transfer is not explicitly declared to the client as profit costs.”
*The SRA Code of Conduct was revised after this decision and can now be found on the SRA website.
There are arguably parallels between telegraphic transfer and FX charges and this may therefore be a matter to which IPReg, and the SRA where firms are also offering services as solicitors, will have to turn their attention.
Firms that routinely apply mark ups to FX transactions that have no bearing on any actual or justifiable risk are charging fees and so must draw attention to and explain those fees to their clients (and charge VAT on them) or explain themselves to their clients and, potentially, to the Regulator.