Selling a business is a major milestone. Whether you are planning your exit, preparing for retirement, or moving on to a new venture, there are many things to consider — from finding the right buyer and negotiating the price to getting the transaction completed smoothly.
However, one issue that can come as an unexpected surprise is VAT on legal fees.
A common question business owners ask is:
“Can my company pay the legal fees and reclaim the VAT?”
In many share sale transactions, the answer is likely to be no.
Understanding who the legal advice is being provided to and planning this from the beginning can help avoid unexpected costs later.
Who is the solicitor acting for?
When a business owner sells their shares in a company, the legal advice is usually provided to the shareholder personally rather than the company itself.
This distinction is important.
Even if the company pays the solicitor’s invoice, this does not automatically mean the company can recover the VAT. HMRC focuses on who received the legal services, not simply who paid the bill.
If the legal advice relates to the shareholder’s sale of their shares, the company will usually not be able to reclaim the VAT on those costs.
Why VAT recovery can be an issue
Many business owners understandably assume that if a company pays an invoice, the company can recover the VAT.
However, VAT recovery depends on the nature of the service provided and who the service was supplied to.
Where legal fees relate directly to an exempt share sale, VAT recovery can be restricted. This means the VAT element of professional fees may become an additional cost of the transaction.
What did the Supreme Court decide?
The position has recently been considered by the UK Supreme Court in the case of Hotel La Tour.
The Court confirmed that VAT on professional fees directly connected with an exempt share sale is not recoverable, even where the proceeds from the sale are used for the company’s wider business purposes.
This decision highlights the importance of considering VAT treatment early when planning a company sale.
Can the invoice simply be issued in the company’s name?
This is a question we often hear from business owners.
The answer is generally no.
An invoice should accurately reflect who the solicitor was acting for and who received the legal advice. Simply changing the name on an invoice does not change the underlying legal relationship or resolve the VAT issue.
Making sure the correct parties are identified from the outset is essential.
Are there any exceptions?
There can be situations where a solicitor provides separate advice to both the company and the shareholders during a transaction.
For example, some elements of the work may relate to the company itself, while other advice relates specifically to the shareholders’ interests.
Where this happens, the work should be clearly separated and the invoices should accurately reflect the services provided and the clients receiving those services.
Plan ahead before selling your business
VAT considerations should not be left until the legal bills arrive.
Before starting a sale process, it is worth discussing:
- who the solicitor will be acting for;
- how the legal costs should be paid;
- whether VAT recovery is likely to be available; and
- whether the transaction structure could create unexpected costs.
Taking advice at an early stage can help you make informed decisions and avoid unnecessary surprises.
Selling your business? We can help
At Attwells Solicitors, we regularly support business owners with company sales, acquisitions and other commercial transactions.
Our Corporate & Commercial team can help you understand the legal implications of your transaction, identify potential issues early and ensure your deal is structured as efficiently as possible.
If you are considering selling your business, speak to us before the process begins.
To find out more about our Corporate & Commercial law services, visit our Business Law pages or get in touch with our team today.
