VAT Recovery on Legal Costs: When Can a Paying Party be Charged? (2026 Guide)
Last reviewed and updated June 2026 by Francis Kendall, Director, Costs Lawyer and Joint Head of Commercial, Kain Knight City.
In short, VAT can usually be recovered from a paying party on assessment only where the receiving party cannot recover that VAT as input tax from HMRC. The indemnity principle limits recovery to what the receiving party is actually liable to pay. Whether VAT is recoverable depends on the receiving party’s VAT status, not the paying party’s.
Key Takeaways:
- Always ask the client whether they can recover VAT as input tax before claiming it on assessment.
- VAT is recovered in two different senses: as input tax from HMRC, and from a paying party on assessment.
- A paying party should only bear VAT where the receiving party genuinely cannot reclaim it as input tax.
- Overseas clients who are not charged VAT cannot recover VAT on assessment.
- Banks, insurers and other partially exempt businesses recover a negotiated percentage of input tax, which flows through to assessment.
Why VAT on legal costs causes contention
The ability to recover VAT on legal costs is often unclear and ambiguous and yet understandably, a 20% difference in the sum to be paid by a paying party on assessment is significant, and often why VAT can lead to contention in cost claims. At Kain Knight, the recoverability of VAT on assessment is one of the most frequently asked questions from our commercial clients, so in this article we are going to explain some of the instances when VAT is recoverable and when it is not.
VAT should be properly chargeable to a client for legal services and, in circumstances where that client is unable to ‘recover’ VAT as input tax, it would be in a position to properly ‘recover’ that VAT in any assessment proceedings from the paying party.
The two meanings of “recover”
The main queries costs lawyers tend to face arise from the use of the word “recover” in both contexts (as exampled in the preceding paragraph). The use of the word ‘recover’ is commonplace in a discussion on a business’ ability to reclaim input tax from HMRC, and it is similarly common to use the word when discussing whether a VAT claim should be made between the parties’ assessment of costs. It is therefore important to distinguish these two concepts.
Your costs lawyer will ask you the question ‘can the client recover VAT?’ (meaning can they recover VAT on assessment as against the paying party)? You may then ask the client if they can recover VAT, and they may well ask their accountant if they can recover VAT and, undoubtedly, their accountant will interpret that question as meaning recover VAT as input tax. When an answer of yes or no is fed back up the chain, confusion results.
The end-user principle: how VAT works in a supply chain
To start with, the concept of an end user must also be borne in mind. HMRC should only be recovering VAT once and only from the end user. Without this principle it is not difficult to imagine scenarios where HMRC recovers a multiple of VAT e.g. within a manufacturing chain where:
(1) raw material is sold to a manufacturer;
(2) that manufacturer makes component parts sold to another manufacturer;
(3) that second manufacturer makes a final product that is sold to a wholesaler;
(3) that wholesaler sells the product to a retailer;
and (4) that retailer sells the product to an individual end user.
That is quite a simple example chain but, assuming all companies are VAT registered companies who charge VAT on their invoices, then HMRC will have recovered 4 separate sets of VAT at the point of each sale which, presumably, increase in value throughout the process.
As a result, the second manufacturer, the wholesaler and the retailer in the above example will recover any VAT they have incurred as input tax within their accounts and only the end user will pay VAT based on the final retail price (assumed to be the highest of the transactions).
Overseas clients, counsel’s fees and the indemnity principle
If a party is not charged VAT by their lawyer (by being overseas for example) then there is no scope for VAT to be recovered by a paying party on assessment, as no VAT is payable by the receiving party and the indemnity principle applies in that one can only recover costs that the receiving party is liable for. However, even that position can be further complicated by the law firm who may have instructed counsel and/or experts etc. who then render invoices to the law firm inclusive of VAT.
In that regard the law firm is not an end user (the client is the end user) and is likely to recover that VAT as input tax and can, arguably, not charge that VAT to their (overseas) client (but some do!).
Nil-rated, reduced-rated and property litigation edge cases
A further issue to complicate matters, and something to be aware of, is that VAT is far from standard and there are a multitude of products/services that are either nil rated (they don’t attract VAT at all) or attract VAT at a discounted rate (below 20%). In the legal field however, we rarely see anything that is outside the standard simple 20% approach.
Property litigation also throws up a further curveball where a landlord is able to elect to VAT register its portfolio on a property-by-property basis.
Partially exempt organisations: banks, insurers and mixed activities
Complex organisations, who may indeed be your client, can also cause an issue in that they may have a mix of activities, some of which attract VAT and some of which do not. A good example of this will be a bank or insurer. In that regard it is not as simplistic as to ascertain if the litigation resulting in a costs award is properly subject to VAT or not. What a business of that nature will do is analyse their portfolio of work on an annual basis and “cut a deal” with HMRC on a percentage that applies to all goods/services they receive and seek to recover VAT (as input tax) on. It is not therefore uncommon for the correct amount to seek to recover in assessment to be a percentage of a percentage and for that first percentage to fluctuate within each accounting period!
How a costs lawyer should frame VAT question
Ultimately, the VAT position is not something we as costs lawyers or solicitors can determine in isolation; it is a question that the client, or their accountants, must answer for us. However, as highlighted at the start, it is incumbent on us to be careful how we ask the question to ensure that the answer given is clear and understandable to prevent contention.
If you need tailored advice on VAT recovery in a specific matter, our team can help. Explore our commercial litigation costs services, our guidance on solicitor and client costs disputes, the Fixed Recoverable Costs regime, or browse our News & Insights page for related topics.
To speak directly to our team, get in touch.
