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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions