VAT on Your Tax Return?

Although expenditure which has a ‘mixed’ private and business element is not strictly an allowable deduction against profits for Income Tax (IT) purposes, in practice HM Revenue and Customs (HMRC) allow such expenditure to be apportioned between the business and private use. This is commonplace when dealing with accountancy fees, which often have both business and private aspects.

The VAT rules are, however, different, because a concessionary treatment is applied. The relevant guide, HMRC Guide VIT13700, states that where ‘small’ amounts of input VAT are concerned, the ‘VAT on a sole trader’s or partnership’s accountancy fees should usually be claimed in full...’.

So, when a limited liability partnership with 23 partners sought to reclaim all the input VAT on the cost of preparing the partners’ tax returns, the partners were no doubt surprised to discover that the VAT inspector regarded the 82 per cent deduction accepted for IT purposes as ‘irrelevant’ since the amounts were regarded as not small.

The matter ended up in front of the VAT Tribunal, which divided the various tax services supplied to the partnership into seven categories and concluded that the partners’ tax returns were partly prepared for business and partly for non-business purposes.

Since the amount involved was not small, the Tribunal concluded that the concession could not apply and the apportionment for VAT purposes had to follow the facts.

The case shows yet again that where a concessionary tax treatment is being relied upon, HMRC may well conclude that this is inappropriate and seek to apply their own reasoning to the particular facts.