Client of a solicitor, operates as a Ltd company, the bill issued on his behalf to another firm has vat etc on it. The other solicitor firm have now paid the bill less the vat as they say he can reclaim this back? Have you ever come across that?
Yes. It only applies in Insurance Company cases and then only to the bills of legal professionals i.e. solicitors and barristers. There was no special treatment up until March 89 when S5(4B) was introduced to the VAT act. This section deems such legal services to be supplied to the Insured and not the Insurance Company. It applies only when a person is indemnified under a policy of insurance which provides for his legal expenses (as most policies do). So now instead of you sending your bill to the insurance company, you send it to the person indemnified. They claim against their Insurance company who pays the non-VAT element and they pay you the full amount and reclaim the VAT. (hence they are not at any loss).
In practice, you send a bill to the Insurance Company for the non VAT element. You send a full bill to their indemnified with credit given for the amount paid by the insurance company. They then pay the balance (which equals the VAT) and subsequently reclaim the VAT. In all cases it is an insurance company that's paying. It only applies to solicitors and barristers (and not, for example, to engineers). In your case above, the funds for the bill paid by the other solicitors must have originated with an Insurance company indemnifying your solicitor's client and the only VAT withheld must have been solicitors and barristers VAT.
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