The Impact of Rising Interest Rates on VAT Recovery for Law Firms

• Some tax advisors suggest that the rise in interest rates creates a partial exemption problem for law firms.
• VAT recovery on practice overheads is determined by the partial exemption standard method.
• As interest rates rise, the value of exempt supplies increases relative to taxable supplies, leading to irrecoverable VAT.
• However, there have been no changes to legislation or significant case law.
• The standard method excludes “incidental financial supplies” such as bank interest from the calculation of supplies.
• The purpose of this exclusion is to ensure that passive income does not affect the apportionment of VAT on expenses.
• Most law firms do not actively earn bank interest, so related VATable expenses are small and do not increase with rising interest rates.
• However, larger practices that actively manage money to earn interest will need to include those expenses in the partial exemption method.

Source: mha.co.uk

Note that this post was (partially) written with the help of AI. It is always useful to review the original source material, and where needed to obtain (local) advice from a specialist.

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