Client account interest and VAT: could separate legal entities help law firms?

That does, however, raise a different possibility

A firm could consider whether legal services that rely heavily on client accounts, such as conveyancing, might genuinely be carried out by a separately authorised entity with its own client account. Other legal services could remain in another entity.

Depending on the facts and the VAT arrangements, this may allow the impact of exempt client account interest on VAT recovery to be more closely aligned with the part of the business that generates it, rather than affecting recovery across the wider firm. It is not an automatic result: the treatment of shared costs, any transactions between the entities and whether they form a VAT group would all need careful consideration.

Commercial and regulatory considerations

There is also a commercial and regulatory cost. Each entity would need to operate as a genuine legal services business, with the appropriate authorisation, governance and ongoing compliance. A restructuring would only make sense where the potential VAT benefit justifies those costs and the change works for clients and the firm.

The key point is that VAT cannot be considered in isolation. Firms facing a material cost from client account interest should assess their current recovery position alongside the way their legal services and client accounts are organised. The right answer will depend on the substance of each firm’s arrangements.

To discuss how client account interest affects your firm’s VAT recovery, please contact David Gage or Sandy Cochrane at Gravita.