Understanding VAT on Legal Fees: Key Updates for 2026

As we begin a new year, it’s an ideal moment for businesses to review how legal costs and VAT will impact their operations in 2026. Legal fees are often a significant expense, and knowing when VAT can be recovered is essential for effective cashflow management and budgeting.

When VAT on Legal Fees Is Recoverable

In many everyday business situations, the VAT charged on legal fees is recoverable. This typically applies when advice or support relates directly to normal trading activities.

Common examples include:

• Contract drafting and negotiation

• Commercial disputes

• Employment law matters

• Debt recovery

• Acquiring business assets

In these scenarios, the legal work supports taxable business activity, so VAT can normally be reclaimed.

Where VAT Treatment Becomes More Complex

VAT can be more challenging to determine when legal fees relate to corporate transactions - such as raising finance, restructuring, or buying or selling businesses. The nature and purpose of the transaction directly affect whether VAT is recoverable.

Here are a few examples to illustrate the differences:

• Bank loans
  Arranging or refinancing a loan to fund business operations
  ➤ VAT is usually recoverable

• Selling your business
  Legal fees related to the sale of company shares
  ➤ VAT is not usually recoverable

• Employee settlements
  Legal advice provided to the employee as part of an agreed settlement
  ➤ VAT is not usually recoverable

For larger transactions, these distinctions can amount to thousands of pounds in VAT - making proper classification important.

Planning Any Legal Work in 2026?

VAT on legal costs is a complex area, and applying the rules incorrectly can be costly. If you're planning a transaction or have questions about the treatment of specific legal fees, our team is here to help you navigate the details and ensure your VAT position is correct.

If you’d like advice tailored to your specific situation, please get in touch.