Is earning interest an ‘economic activity’ for input tax purposes?
One of my clients is a cash-rich limited company that is fully taxable, so it gets full input tax recovery on its expenses. To fully benefit from the high cash balance, my client pays a consultant a monthly retainer fee to advise on the best business bank accounts the company should open, how much to invest and over what period, to maximise the interest earned.
The consultant charges VAT on his fee, which seems correct because his work falls short of arranging a financial product where exemption might apply, but I now have doubts about whether my client can claim input tax. Having read the report in Taxation on 13 August 2026 on the First-tier Tribunal case of Compound Photonics Ltd (TC9934), about whether the holding of intellectual property (IP) in the balance sheet represented an ‘economic activity’ (the answer was ‘no’ according to HMRC and the judge), I wonder if the same outcome applies to my client, ie substituting IP for cash at bank? If so, how should we adjust previous claims?
Query 20,791 – Financier.
Residence nil rate band conundrum
I have recently become confused about the workings of the residence nil rate band. I am faced with the following scenario. A couple has an estate worth £1m plus a house worth £500,000. They have both left their entire estate to each other on the first death and to their two children on the second death.
On the first death, the entire estate will be left to the surviving spouse, so there is no question of any inheritance tax. However, on the second death, can the executors use the two unused residence nil rate bands to reduce the overall estate by £350,000? Can the two nil rate bands of £325,000 be used to reduce the estate by a further £650,000, making the total reduction £1m? This seems logical to me but would mean that couples have £1m of combined allowances so long as they own a property.
Can Taxation readers give some idea how the computations should work, if not as above?
Query 20,792 – Bomber.
Missing underpayment
At the end of 2023-24, my client’s self-assessment balance due of £250 was not collected but scheduled to be coded out under PAYE in 2025-26. It duly appeared in the coding notice issued in March 2025. However, by the time a revised code was issued in December 2025, it had disappeared. I do not know why; although tracking and tracing PAYE underpayments can confuse me, I do not think the client has paid this amount. Then, in the year-end tax return, the HMRC system asked me to confirm the amount of underpayment brought forward that it says is included in the 2025-26 coding – £0.
The literally correct answer is that £0 has been included in the last operative PAYE code for 2025-26, even if I think this is wrong. What is my responsibility to query this? Is a white-space disclosure of my uncertainty sufficient?
Query 20,793 – Macavity.
Joint owners or partnership?
My clients (a married couple) have amassed a considerable property portfolio. They believe that a corporate structure would be best for them but want to ensure that they don’t fall into any tax traps along the way.
The husband and wife own about nine properties jointly and the husband owns one property with relatives where he has a one-third share. Gross rental income in 2024-25 exceeded £150,000; excluding mortgage interest, their net income was £110,000 (£60,000 for the husband and £50,000 for the wife). Mortgage interest was £74,000, leaving net income of £36,000 on a portfolio worth about £3m. The profit is expected to increase as mortgages are paid off.
The key question is whether they are currently meeting the requirements of being a partnership, rather than simply being joint owners. If they don’t, are there steps that can be taken to ensure that they are treated as a partnership when they eventually incorporate in two to three years’ time?
They self-manage the portfolio: source tenants, handle tenancy changes, oversee repairs and liaise with tenants. The husband spends about 20 hours a week on the properties. Does it matter that one spouse spends significantly less time on the property business?
They have modest other income. The husband has a consultancy business and two non-exec directorships, requiring four-to-five days a month. The wife has a salary from her husband’s consultancy business in which she is a director and shareholder. The husband also buys, refurbishes and sells one or two properties a year through another company with his son. His consultancy business also owns commercial and investment properties.
What advice should I give them to maximise their chances of demonstrating that they are a partnership at incorporation? And what are the MTD implications of partnership rather than joint ownership?
Query 20,794 – Investor.
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