Update on VAT Partial exemption in law firms – “Protect and Plan”

Please find attached our update on VAT partial exemption issues for law firms which reflects the current landscape with HMRC and provides an overview of potential actions for law firms given the current understood opinion which is visibly in the public domain for both law firms and their advisors.

The tenure of the briefing note is to help firms protect themselves against the risk of future penalties, protect their position by registering their disagreement with HMRC’s views and plan for the challenge required to shift the opinions of HMRC on this matter through the required legal channels.

Our call to action

We remain keen to support the legal sector on this issue. We have therefore independently commissioned an opinion from an experienced barrister that specialises in VAT cases of this nature, Stephen Morse from Temple Tax Chambers. We are organising an online session during which we will further explain our comments in this email and more importantly Stephen Morse will outline his opinion on this technical issue, the legal arguments that exist and how they interact with case law beyond the scope of the commonly quoted ECJ decision in Regie Dauphinoise.

The intended outcome from this online session is both to inform law firms and hopefully arrange a call to action to facilitate the matter being progressed with HMRC with law firm participation. Overall, we felt this was a more practical and constructive thing to organise to help the legal sector on this issue rather than following the popular trend of simply reiterating that interest income is ancillary!

Stephen’s details can be found at: www.templetax.com/barristers/stephen-morse

If you would like to take part in the online session, please let me know – the session will take place between 11am and 12:30pm on Friday 27 February 2026

 How can we help?

If you would like any help in assessing your firms position for partial exemption, calculating amounts potentially payable, managing aspects such as error and omission claims with HMRC or maybe even considering an Standard Method Override (SMO) then please get in touch.

We have prepared a guidance sheet for law firms who are looking to make an error and omission application to HMRC and we have also prepared a spreadsheet to help firms calculate partial exemption adjustments. If you would like access to these support items, please get in touch.

Overall, our message to law firms here is that they need to consider whether, given the evolution of general knowledge on HMRCs views, their best approach to now mitigate the risk of penalties on this issue is to account to HMRC for the VAT and register their disagreement with HMRC’s stance whilst the matter concludes.

If you would like to join the webinar or would like to contact PKF Francis Clark, please email Andrew Allen, Partner and Head of Legal Sector Andrew.Allen@pkf-francisclark.co.uk