Can my bank charge me VAT on legal costs

SuperHan

moley2727 wrote: »

@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

No, the solicitor isn't the banks employee (or doesn't sound like it will be anyway). From what you have said, they have asked a firm of solicitors to chase their debt, not their in house legal team.

The solicitor will have then charged VAT to the bank.

The bank will put it on their next VAT return.

HMRC will say "you don't make VATable supplies, so because you don't charge VAT on your services, you are not allowed to reclaim it", because that is the VAT rules (per my link above).

Then HMRC will not repay the VAT back to the bank, and the bank will incur that expense as a loss to the business.

They will then recharge it on to you to recoup that loss.

PeacefulWaters

Banks cannot reclaim VAT.

le_loup

Stop!
If you are paying the bank VAT that VAT is paid out by the bank to HMRC. They don't keep it. They don't reclaim it. Legal services are VATable.

grumbler

le_loup wrote: »

Stop!
If you are paying the bank VAT that VAT is paid out by the bank to HMRC. They don't keep it.

I think this is incorrect.
The OP just pays the amount with no VAT included. No VAT goes to HMRC from the bank

Aquamania

I think the OP will have to pay the VAT.

As has been mentioned, Legal Services is a vatable item assuming the provider is registered for VAT.

The question is, who is deemed to have provided the legal services to the OP? Well that should be clear from the invoice. Any VAT charged should be supported by a fully compliant VAT invoice.

There are two possibilities.

1. Legal services were procured by the bank and these are being treated as a disbursement.
i.e. the legal services bill is being passed direct to the OP for payment
In this situation, the OP will effectively be paying the legal services provider directly (with the bank possibly acting as agent in the transaction)
Under such a disbursement, the bank cannot reclaim the VAT charged from the legal services provider.

2. Legal services are procured by the bank and these are being re-sold to the OP by the bank.
The legal services provider raises a bill to the bank. This will include VAT. The bank pays the VAT but reclaims it as input tax.
However the bank will raise an invoice to the OP with VAT on it. This will need to be paid by the OP as it will be treated as output tax that the bank will need to pay HMRC (just like when a retailer sells goods procured from a wholesaler or manufacturer)

Either way the OP will end up paying VAT, but should ensure they are in receipt of a fully compliant VAT invoice first. That will detail who the OP is paying, that the recipient is VAT registered, and indicate that the recipient will be paying the VAT to HMRC.

Edit: Or to look at it in another way, if you don't pay the VAT and you believe the bank will reclaim any VAT it pays, where do you think the money will come from to pay HMRC for the vatable service provided?