News
How VAT May Impact Solicitors’ Firms and Legal Practices
11 Jun 2026
In recent years, interest rates have increased and as a result of this, the amount of interest received from monies held in general client accounts has risen, which has typically led to an increase in the interest income of legal practices.
This may result in your VAT registered business being faced with partial exemption.
What is partial exemption?
When a business makes a mixture of taxable and exempt supplies, it is classed as partially exempt. As a business can only recover the input tax which relates to its taxable supplies it must complete a calculation to restrict any input tax claim to these items.
What has changed?
HMRC VAT rules state that income received as interest is classed as exempt from VAT.
Historically, due to low interest rates, this income was less than 1% of the total turnover of the business. When completing partial exemption calculations, the standard method states that the level of taxable supplies is rounded up to the nearest whole number. So, if the exempt income from interest was less than 1% of turnover, this would mean that the taxable income was more than 99%. When rounded up to the nearest whole number this would result in the business having 100% of taxable supplies and so did not have to worry about the issue of partial exemption.
Now that position has changed…
If the level of exempt income in a period exceeds 1% of the total turnover, this places a business into the category of being partially exempt. The default partial exemption calculation is called the Standard Method and is based upon the levels of income received in a period.
How can we help?
At WR Partners, we have a dedicated VAT Consultant who can review your transactions and business records and complete the partial exemption calculation for you.
