Can my bank charge me VAT on legal costs

moley2727

Hi,

I have agreed to pay my bank a debt I owe them, plus legal costs. They are charging me VAT on these legal costs. Is that ok? The bank is VAT registered, I am an individual and obviously not VAT registered. I understand they will reclaim VAT on their costs from HMRC. By recovering VAT from me would result in double recovery?

Is that correct?

Thank you.

worried_jim

I think they have just provided you with a break down of costs. Seems perfectly reasonable that a legal firm charges VAT.

moley2727

Thanks for your reply.
Could this be 'disbursements' ? and therefor not vatable? Charging me VAT and claiming back, sounds wrong no?

Thanks again fro taking the time

colsten

The bank need to pay the solicitor's bill, which includes VAT. Judging by your post, the bank has the right to recover their cost from you. So you need to pay the costs including the VAT.

Why do you say you understand the bank will reclaim the VAT from the HMRC? Who told you that they will? Who told you that the HMRC (i.e. all tax payers) will pay the VAT of your bank's solicitors?

moley2727

colsten wrote: »

The bank need to pay the solicitor's bill, which includes VAT. Judging by your post, the bank has the right to recover their cost from you. So you need to pay the costs including the VAT.

Why do you say you understand the bank will reclaim the VAT from the HMRC? Who told you that they will? Who told you that the HMRC (i.e. all tax payers) will pay the VAT of your bank's solicitors?

As the solicitors client, i.e the bank, is VAT registered they will claim the full amount they charge me back from HMRC. I am not VAT registered and cant claim it back. Does that mean VAT being charged twice?

colsten

moley2727 wrote: »

As the solicitors client, i.e the bank, is VAT registered they will claim the full amount they charge me back from HMRC. I am not VAT registered and cant claim it back. Does that mean VAT being charged twice?

what makes you think banks can claim back VAT for their solicitor's costs from the HMRC?

grumbler

colsten wrote: »

what makes you think banks can claim back VAT for their solicitor's costs from the HMRC?

This is how VAT works.
Generally, a company pays VAT to other companies and collects VAT on goods/services it sells.

The net amount (difference) goes to HMRC. 'Claim' means just subtracting the VAT paid to the solicitor from the amount paid to HMRC.

So, in fact the true cost of a solicitor for a company doesn't include VAT.

That's why price for businesses is always quoted without VAT - it's the actual cost for VAT-registered businesses.

That said, if the solicitor isn't VAT-registered or is the bank's employee, there is no any VAT to 'claim'. Also, there can be something specific for banks that I don't know about.

moley2727

Have I got this completely wrong?

A vat registered company will charge VAT for goods or services. In the case of goods, the company can claim back the difference between the cost they paid out and the amount they received/sold the goods for.

In my case the VAT a charge is for services. If the VAT registered company call the service, disbursement, VAT is not chargeable?

If they call it services then VAT is charged and reclaims the VAT back from HMRC? Maybe they claim part of it back?

See here: http://www.lawsociety.org.uk/support-services/advice/practice-notes/vat-on-disbursements/

Is that how it works ?

Thanks

moley2727

grumbler wrote: »

This is how VAT works.
Generally, a company pays VAT to other companies and collects VAT on goods/services it sells.

The net amount (difference) goes to HMRC. 'Claim' means just subtracting the VAT paid to the solicitor from the amount paid to HMRC.

So, in fact the true cost of a solicitor for a company doesn't include VAT.

That's why price for businesses is always quoted without VAT - it's the actual cost for VAT-registered businesses.

That said, if the solicitor isn't VAT-registered or is the bank's employee, there is no any VAT to 'claim'. Also, there can be something specific for banks that I don't know about.

Yes I get that, thanks. If the solicitor acts for the client, in this case the bank, is that then called a disbursement, and VAT should not be charged?

SuperHan

moley2727 wrote: »

Have I got this completely wrong?

A vat registered company will charge VAT for goods or services. In the case of goods, the company can claim back the difference between the cost they paid out and the amount they received/sold the goods for.

In my case the VAT a charge is for services. If the VAT registered company call the service, disbursement, VAT is not chargeable?

If they call it services then VAT is charged and reclaims the VAT back from HMRC? Maybe they claim part of it back?

See here: http://www.lawsociety.org.uk/support-services/advice/practice-notes/vat-on-disbursements/

Is that how it works ?

Thanks

A VAT registered company can only claim VAT back if it makes VATable supplies. Energy providers, as one example, make some VAT exempt supplies, so they cannot claim all of their VAT back, even though they will need to be VAT registered as they breach turnover requirements. Insurers, similarly, won't be able to claim back VAT on anything relating to insurance activities.

European banking activities are considered exempt (http://www.pwc.com/gx/en/financial-services/the-real-impact-of-the-vat-exemption-on-eu-banks.jhtml), so they will not be able to reclaim VAT on anything relating to the banking services they offer.

So, you will have to repay it, as they will not be able to reclaim it.

Happy to go in to further detail if you need additional explanations.

moley2727

@Grumbler sorry if i am not explaining myself well enough.

Refereeing to your last paragraph. The solicitor IS the banks employee. My legal agreement to pay this debt back is with the bank. They have employed a solicitor to collect this debt from me. So in effect should the solicitor be charges me VAT on behalf of the bank? Will this charge then be on the banks next vat return?

Thanks