Wednesday, 30 January 2013

VAT on Legal Fees are not Always Recoverable

Issue 12: VAT on Legal Fees 
It is quite common for a business to pay the expenses incurred by a third party.

Imagine you are moving into your business premises and as part of the negotiation for the lease you agree to pay the landlord’s legal expenses. Now you are thinking “that’s a small price to pay for such a fabulous building plus I can recover the VAT”. WRONG!

Remember, one of the basic VAT rule is who is the legal services being supplied to? In this instance it’s the landlord, so you my friend cannot recover the VAT even though you are the one that paid it. Don’t cry because I bear glad tidings.

Assuming that the landlord is VAT registered and the rent they are charging you is standard rated, this is how you get out of that trap:

Get the solicitor to send you the bill with just the net amount and ask them to send a VAT only invoice to the landlord. Simples.

What that does is you only pay the net legal fees and the landlord recovers the VAT. Just always be aware of any transactions that involve three parties.

I am Marlon “Mr. VAT” Appleton


  1. If you agree to pay the legal fees for the landlord, then you have a chain supply of services, because the agreement between you and the landlord is also a taxable supply of services. I assume that the legal fees are related to the lease agreement, and if we also assume that the landlord has full VAT liability, then why shouldn't you then be able to recover the VAT?


  2. Hi Bjorn, many thanks for your comment. I must however stress that it is not as simple as you stated. First we have to determine whether the landlord has an option to tax on the building. If not then the rental supply is exempt.

    With regards to your second point, the recoverability of input VAT , in UK VAT law, is based on the principle of who the service is being supplied to. In this case the legal services are provided to the landlord and not the tenant. Remember, the determining factor is not who paid the VAT. So based on my example above only the landlord can recover the VAT on the legal fees subject to certain conditions.