When to reclaim input VATLegal fees – what can be reclaimed – income taxThere are different rules relating to the position on legal fees as regards income tax and VAT. In general it is likely that VAT will be allowed on a greater range of costs than will be permitted for income tax purposes.
A full deduction for income (and corporation) tax purposes will be permitted on legal fees relating to the following matters:
- Debt collection
- Employment matters
- Rent reviews
- Disputes regarding trading matters
- Renewal of leases
- Acquisition of new leases where the term of the lease is for less than 12 months
Legal fees – what can’t be reclaimed – income tax- Acquisition of properties – including freeholds and leases where the term is for more than 12 months. Note that the restriction for leases applies only to new leases – legal fees incurred on the renewals of existing leases are allowed.
- All matters relating to the creation, amendment or cancellation of share capital. This is regarded as a capital rather than a revenue expense.
- All matters relating to changing the capital of a partnership or any LLP
- Where there is a tax enquiry resulting in the adjustment of profits for more than just a single year, all costs incurred in connection with the enquiry are not allowed. This applies to both legal and accountancy fees. Note that where a tax enquiry results in there being no adjustment, or just an adjustment to a single tax year, fees are allowable.
- Anything relating to the personal affairs of sole proprietors, partners, directors or shareholders are not permitted as they are regarded as being personal matters and not for the benefit of the business.
Legal fees – what can be reclaimed – VAT positionThe rules regarding VAT are much more generous than those relating to income tax, and in general any VAT incurred on matters that relate to the business can be reclaimed in full.
The main restrictions on this are:
- VAT incurred on legal fees defending criminal charges are not allowed, even if the proceedings threaten the ability of the business to continue.
- VAT on third party legal fees cannot be reclaimed. This is typically found where a tenant is responsible for meeting a landlords fees in relation to lease renewals. If an invoice is addressed to the landlord but paid by the tenant, the tenant cannot reclaim the VAT because they do not hold a valid VAT invoice in the name of the business.
- VAT on any matters that are regarded as being of a personal nature, rather than relating to the business.
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