UK: Direct And Indirect Tax Implications Of Expenditure On Partnership Tax Work

Last Updated: 10 January 2013
Article by Smith & Williamson


The method of computing the taxable profit of professions and vocations for income tax or corporation tax purposes follows that for trades and for business expenditure to be tax deductible it must be incurred wholly and exclusively for the purposes of the trade (ITTOIA s34 and CTA09 s54). Where expenditure is incurred for more than one purpose, then a deduction is permitted for the portion of expenditure incurred wholly and exclusively for the purpose of the trade.

For VAT purposes input VAT means VAT on the supplies of goods or services purchased and used or to be used for the purpose of the business carried on. Where VAT is incurred on costs with both business and other purposes, input VAT is only that portion of input VAT that relates to costs incurred for business purposes, though the non-business VAT element may in certain cases be treated as input VAT by specific regulation. For VAT purposes although VAT may be incurred on costs which benefit the business, this does not necessarily make them creditable input VAT. The VAT must be incurred on costs which are for the purpose of the business (as well as its benefit) to be creditable input VAT.

Input VAT can be recovered according to the input VAT recovery rate for the business. It will be fully recoverable to the extent that the costs generating the input VAT can be related to sales of the business which are zero rated or subject to VAT, and certain overseas sales. It will not be recoverable to the extent that the costs relate to exempt or non-business sales, subject to de-minimis limits (VATA s24-26).

Costs incurred by a partnership on tax compliance and advisory work may well have both business and other purposes. Business expenditure will be that work necessarily undertaken for the purpose of the partnership, while non-business expenditure may be incurred to meet the personal needs of individual partners.

Care is therefore required when considering the element of costs which can be deducted for direct tax purposes and the amount of input VAT that can be offset against any output VAT liability. The input tax aspects of this issue were discussed in a recent First Tier Tax Tribunal case. While the decision is at a relatively junior level in the judicial system, it is helpful in highlighting the issues to consider. It is also an example of an instance where the treatment for direct tax and indirect tax was not the same, in that different proportions of costs where treated as "business" expenses. A summary of the case decision is noted below.

For a more detailed discussion of the direct and indirect tax aspects of business expenditure in your business, please get in touch with your usual Smith & Williamson contact, or one of our professional practice tax planning and advisory service specialists listed on the Smith & Williamson website.

First –tier Tribunal decision in the case of Mundays LLP

The disallowance by HMRC of input VAT on tax services provided to a partnership was the subject of a First tier Tribunal case concerning Mundays LLP. The Tribunal concluded that input tax on approximately 55% of regular costs was recoverable as a business expense. This was despite the fact that generally 82% (items a, b, d, e and f in the table below) of the costs were allowed as deductible for direct tax purposes.


Preparation of a monthly tax reserve for deduction from partnership drawings



Production of partnership drawings schedule based on tax estimates



Meeting with individual partner to collect personal information



Provision of partnership profit information to tax manager to enable the partnership tax return to be prepared



Advising company accountant of amounts of tax to pay on behalf of partner from the tax reserve held in partnership books (paid twice a year)



Reconciliation of partnership tax reserves in accounts to payments and reserve carried forward



Preparation of partner's tax returns




In addition ad hoc tax work was provided on recalculating tax reserves when partners joined and left the partnership (referred to in the case as item (h)).

The Tribunal concluded items (c) and (g) related to the partners individually and not to the partnership business. The Tribunal concluded that expenditure on item d was an inevitable expense of carrying on the business in partnership and would form part of the partnership's general overheads and for VAT purposes would be fully recoverable.

Items a, b, f and h were found to have a purpose (keeping the tax reserve as working capital for the business) and a benefit to the business (not a purpose), where the benefit was some assurance that cash was available to meet tax liabilities of individual partners therefore avoiding reputational risk to the business potentially caused by non-payment of tax. They concluded that input VAT on these costs should also be fully recoverable.

The Tribunal concluded that the remaining costs (items c, e and g) were not incurred for the purpose of the partnership business and input VAT on these costs should be disallowed.

The argument had been put forward that these costs were de minimis from a VAT perspective in line with a concessionary treatment operated by HMRC and set out in HMRC's manual VIT13700. However as the practice was concessionary and in the context of the total cost per year to the partnership, these amounts were not small and HMRC were therefore entitled to refuse repayment of the related input tax.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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