Can I claim expenses for business-related legal advice?

Can I claim expenses for business-related legal advice?

Businesses run on decisions, and decisions often come with legal consequences. Whether you’re reviewing a commercial contract, dealing with a staff issue, protecting your brand, chasing an overdue invoice, or navigating a regulatory question, legal advice can be a practical necessity rather than a luxury. Naturally, many business owners ask the same question: can I claim the cost of business-related legal advice as a deductible expense?

The answer is often “yes, sometimes,” but it depends heavily on what the advice relates to and how closely it connects to your day-to-day trading activities. Legal fees can be deductible where they are incurred wholly and exclusively for business purposes and are of a revenue nature (connected to running the business) rather than a capital nature (connected to acquiring, creating, or improving a long-term business asset or structure). In practice, the line between “revenue” and “capital” can be subtle, and the facts matter.

This article explains the typical rules and grey areas, how different types of legal costs are treated, what happens when a bill covers both business and personal matters, and how to keep your records robust. Because tax treatment differs by jurisdiction and business structure, treat this as general guidance and consider tailored advice for your circumstances.

What tax authorities usually look for

When deciding whether a legal expense is deductible, tax authorities typically focus on two core questions:

1) Was the expense incurred for business purposes? Legal fees are more likely to be deductible when they relate directly to the business’s trading activities, obligations, and risks. If the advice supports generating income, protecting trading profits, meeting legal obligations in the course of trade, or resolving disputes arising from trading, it tends to be viewed as business-related.

2) Is the expense “revenue” rather than “capital”? Even if an expense is business-related, it may be treated as capital if it relates to acquiring, creating, or enhancing a long-term asset or enduring benefit. Capital costs are usually not deductible against trading profits in the same way as day-to-day running costs, though they may be relevant to capital allowances, capital gains, or other tax computations depending on your system.

These two questions often overlap. For example, legal fees to enforce a contract with a customer can be both business-related and revenue in nature. Legal fees to buy a property to use as business premises can be business-related but capital in nature. The details of what the lawyer is doing—and why—are crucial.

Common examples that are often deductible

While no list is universal, there are several categories of legal advice that are commonly treated as deductible business expenses because they are closely tied to day-to-day trading or protecting existing profits.

Debt recovery and enforcing customer contracts

If you instruct a solicitor to pursue unpaid invoices, send letters before action, or issue a claim to recover trading debts, those legal fees are typically connected to collecting revenue that your business has earned. This usually makes them revenue expenses and therefore commonly deductible. The same logic often applies to legal costs incurred to enforce the terms of a trading contract—such as compelling a customer or supplier to perform their obligations or pay what is due.

However, the situation can shift if the dispute is really about acquiring an asset or changing the structure of your business. As a rule of thumb: recovering trading income is more likely to be deductible than fighting over ownership or acquisition of something long-term.

Employment and HR matters

Legal advice on employment issues—disciplinary procedures, grievances, employment contracts, redundancy consultations, workplace policies, or defending employment tribunal claims—often arises from running a business with staff. Because these issues relate to operational management, legal fees here are commonly viewed as revenue and potentially deductible.

That said, there can be edge cases. For example, if legal advice is mainly about restructuring the business in a way that creates a long-term change in how it operates (such as a major reorganisation, separation, or merger), that element may be treated differently.

Regulatory compliance for ongoing operations

Many industries require ongoing compliance: data protection, consumer law, advertising standards, licensing requirements, health and safety, and sector-specific regulations. Legal advice that helps you comply with rules in order to continue trading is often a normal operating cost and can be deductible.

But if compliance work is part of establishing a new line of business or obtaining a new licence that creates an enduring new capability, some systems may treat it as capital or at least not a straightforward revenue deduction. The key is whether the advice relates to maintaining existing trading versus creating a new long-term advantage.

Commercial disputes arising from trading

Disputes with suppliers, customers, landlords, or service providers can be part of business life. If legal advice is needed to manage or settle disputes arising from existing trading relationships, those fees are often treated as revenue expenses. Examples include disputes over service quality, delivery delays, pricing disagreements, or breach of trading terms.

Legal costs to negotiate settlements in such disputes are also commonly deductible, provided the dispute is operational in nature. If the dispute relates to buying or selling a major business asset, the treatment may change.

Routine contract reviews for trading

Legal advice to review or draft routine trading contracts—terms and conditions, supplier agreements, service contracts, standard customer agreements—can be a regular operational cost. Where the contracts relate to ordinary revenue-generating activity, the associated legal fees are often deductible.

In contrast, legal fees to negotiate the purchase of a business, a property, or a significant intellectual property asset are more likely to be capital. “Routine” here means part of normal trading and not a step change in the ownership or structure of the business.

Examples that are often not deductible (or treated as capital)

Some legal costs are closely linked to creating or acquiring something enduring—such as a new asset, a major structural change, or a long-term advantage. Even if these costs are “for the business,” they are often treated as capital. Capital treatment doesn’t necessarily mean “no tax relief ever,” but it usually means the relief is claimed differently than a simple deduction against trading income.

Buying or selling property and major assets

Legal fees incurred in buying a building for business premises, purchasing land, or selling a major business asset are commonly capital in nature. Conveyancing fees, title checks, lease acquisition costs, and similar expenses often fall into this bucket. If the legal work is part of acquiring an asset that will be used over many years, the cost tends to be treated as part of the asset’s acquisition cost.

Similarly, legal fees for purchasing major equipment, negotiating long-term financing tied to assets, or dealing with asset transfers can be capital depending on the underlying transaction.

Forming, buying, or selling a business

Legal fees to incorporate a company, draft shareholders’ agreements, admit new investors, carry out due diligence on an acquisition, or sell the business often relate to the business’s structure or ownership rather than day-to-day trading. These are commonly treated as capital or not deductible against trading profits.

Even if the goal is to support future profits, tax systems often distinguish between “earning profits” and “setting up the structure through which profits are earned.” Costs tied to the structure are more likely to be capital.

Raising capital and share issues

Legal fees for issuing shares, bringing in venture capital, restructuring share classes, or preparing investment documents are often treated as capital. These costs relate to securing funding and ownership arrangements, which typically have an enduring impact on the business.

On the other hand, legal fees related to ordinary borrowing for working capital can sometimes be treated differently, depending on whether the borrowing is part of normal trading finance or tied to acquiring a capital asset. The details of the financing and what it’s used for can matter.

Protecting and acquiring intellectual property rights

Intellectual property (IP) is an area where the line can be blurry. Legal costs to register a trademark, file a patent, or acquire IP rights are often considered capital because they create or strengthen an enduring asset. In many systems, the cost of creating or purchasing IP is not treated as an ordinary running cost.

However, legal fees to defend your existing trademark from infringement, enforce your rights against an infringer, or respond to a claim that your marketing infringes someone else’s IP may be more operational and therefore potentially deductible. Again, the “what for?” question is decisive: creating the asset can be capital; defending ongoing trading rights can be revenue.

Legal costs connected to fines and penalties

Even when legal advice relates to a business matter, systems commonly restrict deductions for fines and penalties and sometimes for costs closely associated with them. While legal advice to help you comply and avoid penalties is generally different from paying the penalty itself, some jurisdictions also limit deductibility of costs tied to wrongdoing or illegal activity. If the facts involve regulatory breaches, it’s especially important to seek tailored tax advice.

Personal legal matters paid by the business

If the legal matter is personal to the owner, directors, or employees—such as personal divorce proceedings, personal property disputes, or private legal claims—the business generally can’t deduct those costs just because the business paid the bill. Doing so can also create additional tax issues, such as benefits-in-kind, dividends, or drawings, depending on the business structure.

Sometimes a case has both personal and business dimensions. In those situations, a sensible and well-documented allocation is usually required, and some systems are strict about refusing a deduction if costs cannot be separated.

The “wholly and exclusively” principle and mixed-purpose bills

In many tax systems, deductible business expenses must be incurred wholly and exclusively for business purposes. Legal advice can easily become mixed-purpose. For example:

• A sole trader consults a solicitor about a contract dispute and also discusses personal liability concerns or personal finances.

• A director gets advice about a dispute that affects the company but also concerns their personal reputation or personal guarantee.

• A landlord-tenant dispute involves a property that is partly used for business and partly as a home.

When bills cover both business and non-business elements, the safest approach is usually to request itemised invoices or a fee breakdown. If the business element can be identified, an apportionment may be possible. Without an allocation, authorities may disallow the whole amount or challenge the business portion.

A practical tip: ask your solicitor at the outset whether they can record time and workstreams separately. A clear engagement letter and itemised billing can make a significant difference if you ever need to justify the deduction.

Revenue vs capital: how to think about the difference

Because “revenue” and “capital” are such central concepts, it helps to understand the underlying logic. A simple way to view it is:

Revenue legal costs help you run the business as it exists today: collecting income, meeting routine obligations, managing employees, maintaining compliance, and resolving disputes arising from trading.

Capital legal costs help you create, acquire, or reshape the business for the long term: buying assets, securing ownership rights, raising investment, expanding into a new structure, or obtaining an enduring advantage.

Here are some “contrast pairs” that illustrate how the same type of work can fall on different sides of the line:

Contract work: reviewing customer terms for ongoing services (often revenue) versus negotiating the acquisition of a competitor’s customer book as part of buying their business (often capital).

Property work: negotiating a short-term service office contract in the normal course of operations (often revenue) versus conveyancing and due diligence for purchasing a freehold building (often capital).

IP work: enforcing an existing trademark against infringement (often revenue) versus filing and registering a new trademark to create a new protected asset (often capital).

Business changes: routine advice on updating internal policies (often revenue) versus legal work to restructure ownership or create a new corporate holding structure (often capital).

Because legal matters can contain elements of both, it’s not always neat. But if you can describe the legal work as “keeping the engine running,” it tends toward revenue. If it’s “buying a new engine” or “rebuilding the car,” it tends toward capital.

How business structure can affect the analysis

Your business structure—sole trader, partnership, or company—can influence both the practical approach and the risk profile of claiming legal fees.

Sole traders and partnerships

For unincorporated businesses, business and personal affairs can feel closely linked, and that’s where mixed-purpose issues often arise. If you pay a solicitor from your business account, that doesn’t automatically make the cost a business expense. The purpose of the legal advice is what matters.

Because the owner and the business are not legally separate in the same way as a company, it can be easier for private and business motives to blur. This makes documentation and clear invoicing especially important.

Limited companies

Companies are separate legal entities, so legal advice obtained for the company’s business should be contracted by the company and invoiced to the company. When a company pays for legal advice that primarily benefits an individual (such as a director’s personal matter), tax consequences can arise—sometimes as a benefit provided to the individual, or as a distribution of profits in some systems.

For companies, it’s wise to ensure that engagement letters name the company as the client where appropriate, and that invoices describe the work as relating to corporate matters rather than personal ones.

When legal advice is preventative rather than reactive

Not all legal advice arises from a dispute. Many businesses seek advice to prevent problems: reviewing standard terms, updating privacy notices, implementing employment policies, or ensuring marketing claims comply with consumer rules. Preventative legal advice can still be business-related, and in many cases it is a normal running cost, particularly where it supports compliance and reduces business risk in ongoing operations.

The key question remains: is it part of running the current business, or part of creating a new enduring asset or structure? Preventative advice often falls into “running the business,” but large projects connected to expansion, acquisition, or new long-term rights may be capital.

Legal fees related to disputes: settlements, damages, and insurance

When legal disputes settle, the settlement payment, damages, or compensation may have its own tax treatment separate from the legal fees. The nature of the settlement can matter. For example, paying compensation for breach of a trading contract might be treated differently than paying to exit a long-term lease or to acquire someone else’s rights.

If your business has legal expenses insurance, the deductible question can also shift. If an insurer reimburses part of your legal fees, you generally can’t claim a deduction for costs you didn’t ultimately bear. In practice, you usually claim what you pay net of reimbursements, and you keep records showing what was covered and what wasn’t.

In some situations, an insurer may pay the solicitor directly. Your bookkeeping still needs to reflect the reality: the business’s expense is the portion you actually incur. Keeping clear documentation from the insurer helps prevent confusion later.

VAT, sales tax, and what you can claim back

In jurisdictions with VAT or similar consumption taxes, legal services may be subject to VAT. Whether you can reclaim that VAT depends on your VAT registration status and whether the legal services relate to taxable business activities. If the legal advice relates to exempt activities, or to private matters, VAT recovery may be restricted.

Even within a single invoice, the VAT position can become complicated if the work is partly business and partly private. If VAT recovery matters to you, ask for itemised invoices and ensure the supplier invoice meets the requirements for VAT claims in your jurisdiction.

What to do when a legal bill covers both capital and revenue work

Some legal engagements are naturally mixed even within a purely business context. For example:

• A solicitor helps you renegotiate a lease (potentially capital if it secures a long-term right) and also advises on a dispute with the landlord about service charges (often revenue).

• A law firm supports an acquisition (capital) and also drafts employment contracts for new hires as part of integrating operations (often revenue).

• A lawyer registers a trademark (often capital) while also sending cease-and-desist letters to protect an existing brand from infringement (often revenue).

In these cases, the best practice is to allocate the costs. Ask the firm to break down fees by task. If the work was done under a single retainer, request a schedule of time spent on each workstream. The more contemporaneous and professional the allocation, the more defensible it usually is.

If you are unable to obtain a breakdown, you may still be able to make a reasonable apportionment based on available evidence (emails, project plans, matter descriptions), but that carries more risk. Tax authorities generally prefer allocations supported by invoices, engagement letters, and time records.

Record-keeping: how to make your claim easier to defend

Even if your legal fees are clearly business-related, poor documentation can create problems. Good record-keeping is not just about satisfying a compliance requirement; it also helps you be consistent and avoid over-claiming or under-claiming expenses.

Here are practical steps that tend to help:

Keep the engagement letter or retainer agreement. It usually states who the client is, the scope of work, and the reason for the advice. This can be strong evidence that the work was for business purposes.

Request itemised invoices. Ask for descriptions that explain the nature of the work: “Debt recovery for invoice #123,” “Employment advice relating to grievance procedure,” “Contract review for customer services agreement,” and so on.

Maintain supporting correspondence. Keep relevant emails, letters, and internal notes that show why you sought advice and how it relates to business operations.

Track reimbursements and insurance recoveries. Keep insurer statements and records of payments so you can show the net cost incurred by the business.

Document allocations. If you split an invoice between business and personal or between revenue and capital, keep a short written explanation of your reasoning, ideally with reference to the invoice breakdown.

Be consistent in bookkeeping. Use consistent categories such as “Legal and professional fees,” and consider separate accounts for “Legal fees – operational” and “Legal fees – capital projects” if your accounting system supports it. This can make year-end treatment clearer.

Frequently misunderstood scenarios

Some legal expense situations catch businesses out. Here are a few that commonly cause confusion.

“It helps my business, so it must be deductible”

Many expenses help a business in a broad sense, but deductibility usually depends on the direct purpose and nature of the expense. A legal fee that helps you buy a building helps your business, but it is commonly capital. A legal fee that helps you write better terms and conditions may help your business too, and it may be revenue. The benefit alone isn’t decisive; the character of the expense matters.

Director’s personal legal advice paid by the company

Sometimes directors ask the company to pay legal fees because they feel the issue is “connected” to the business. If the advice primarily benefits the individual personally, paying it through the company can trigger tax consequences and may not be deductible for the company. It’s safer to clarify the client (company or individual) and the purpose of the advice before the bill is incurred.

Disputes about ownership or shareholder relationships

Legal fees for shareholder disputes, changes in share rights, or disputes over control can be tricky. Even though such disputes can affect the business’s ability to operate, they often relate to the ownership and structure of the entity. As a result, they are frequently treated as capital or non-deductible against trading income in many systems.

Where the dispute also includes operational elements, splitting the invoice may be possible. For example, advice about business contracts and operational continuity might be revenue, while advice about share transfers might be capital.

Lease negotiations and property disputes

Legal fees tied to lease renewals, lease premiums, or securing long-term rights to occupy property can be treated as capital in some contexts, while fees to resolve disputes over service charges, repairs, or day-to-day lease compliance may be treated as revenue. Because leases sit in the middle of “operations” and “enduring rights,” it’s particularly useful to get detailed invoices.

Starting a new venture or expanding into a new line

Legal costs incurred before trading begins—such as incorporating a company, negotiating founders’ agreements, or setting up key IP—are often treated differently from costs incurred in an existing trade. Some systems restrict deductions for pre-trading expenditure or treat it as capital. Once the business is actively trading, ongoing legal costs related to operations are more likely to be deductible.

Practical checklist before you claim legal fees

If you’re looking at a legal invoice and wondering whether it’s claimable, work through this checklist:

1) What was the legal advice for? Write a one-sentence summary: “Debt recovery for customer invoice,” “Employment tribunal defence,” “Trademark registration,” “Purchase of commercial unit,” etc.

2) Is it connected to day-to-day trading? If it’s about selling goods/services, collecting income, managing employees, handling customers or suppliers, or staying compliant while trading, it often leans toward deductible.

3) Does it create or improve a long-term asset or structure? If it’s about buying property, acquiring a business, raising equity, registering IP, or restructuring ownership, it often leans toward capital or non-deductible as a simple trading expense.

4) Is there any personal element? If yes, seek a breakdown and allocate the cost. Avoid claiming personal legal fees as business expenses.

5) Do you have the paperwork? Keep the engagement letter, itemised invoice, and supporting emails. If needed, ask the solicitor for a breakdown.

6) Were you reimbursed? If an insurer or another party paid part of the costs, claim only what the business actually incurred.

When it’s worth getting tailored tax advice

Some legal expense situations are sufficiently complex that a quick rule-of-thumb is risky. It can be worth obtaining targeted advice (from an accountant or tax adviser) when:

• The invoice is large relative to your profits.

• The work relates to acquisitions, restructures, or share transactions.

• The invoice mixes multiple categories (operational disputes plus capital projects).

• There is any personal benefit to owners or directors.

• The matter involves regulatory breaches, penalties, or litigation risk.

Good advice can help you allocate costs correctly, decide whether the expense should be treated as capital, and ensure the supporting documentation is strong. It can also help you avoid accidentally creating payroll or personal tax issues if the business pays for legal services that benefit individuals.

Final thoughts

Claiming expenses for business-related legal advice is often possible, particularly when the advice relates to operational matters such as debt recovery, employment issues, routine contracts, and disputes arising from normal trading. The biggest pitfalls tend to occur when legal fees relate to capital projects (like acquiring property, registering IP, buying or selling a business, or changing ownership structures) or when there is a personal element mixed into the legal work.

The best way to protect your position is to focus on the purpose of the legal advice, distinguish between revenue and capital activities, and keep thorough documentation—especially itemised invoices and engagement letters. If the legal matter is significant or structurally complex, getting tailored tax guidance can save money and reduce risk.

Ultimately, legal advice is an investment in clarity and risk management. With careful categorisation and good records, you can often claim legitimate business-related legal expenses confidently while staying on the right side of the rules.