Have we made partial exemption errors?
One of my clients is registered for VAT as a group registration. Two of the three group companies are partially exempt and the other is fully taxable. My client has carried out a partial exemption calculation for each company separately, working out each of the two company’s total exempt input tax based on the standard method of calculation. My client has also worked on the basis that each company gets its own partial exemption de minimis threshold.
My concern is that the residual input tax calculation should be based on group turnover rather than the turnover of each individual company. Is that correct? And how do the de minimis rules work for a partially exempt group?
If my client has made past errors, how should they be corrected?
Query 20,627– Eileen.
Foreign employer
I have for some years prepared statutory accounts for a UK-incorporated company that is owned, controlled and managed by two American residents. The company has no presence in the UK: it was incorporated here because its main customer is an EU institution that insisted on dealing with an EU-incorporated supplier (pre-Brexit). The individuals also own an American incorporated company that operates in the same field, but has no corporate shareholding in the UK company. I have recently discovered that the American company uses the services of a UK resident person on terms that suggest he should be taxed as an employee. I understand that a UK employee of a non-resident company should set up a ‘direct payment National Insurance scheme’ and accounts for PAYE and primary NIC, but there is no liability for secondary NIC if the employer has no ‘presence’ here.
I would appreciate any experience readers have of such arrangements, and also comments on whether I should investigate if this person might himself be regarded as a ‘presence’, creating a liability to NIC, or if HMRC might investigate to see whether he also works for the UK company and on what terms.
Query 20,628– Deepen Eye.
Should we raise a glass to HMRC at the Christmas bash?
How should a VAT-registered members’ association treat VAT when billing members for its Christmas bash attended by members, employees and clients – but no relatives? A member queried an invoice that correctly applied VAT to miscellaneous services but listed the bash cost (VAT-inclusive) without VAT. Was this a disbursement or a recharge?
HMRC’s guidance clarifies that for disbursement treatment, the exact cost incurred must be recharged. Otherwise, it’s a taxable supply subject to VAT. Entertainment recharges by VAT-registered entities are taxable. VAT Notice 700/65 allows input tax recovery for staff parties attended by directors or partners, with apportionment if non-employees are present. Assuming members are akin to partners, and with 25 members, three employees and 125 clients attending, each member could recover 18.3% of their input tax – about £8.74 on £1,200 total VAT.
If there are errors, VAT Notice 700/45 requires them to be corrected – even if net VAT due is unchanged. Since the invoice included the association’s VAT number, VAT liability applies. If the association won’t confirm the recharge or add VAT, and input tax is roughly equivalent, the net error may be nil. But should an adviser resign or report? There’s no clear de minimis threshold – zero is still a number. With £1,200 in VAT over one year, and adjustments potentially reaching back four years, the cumulative amount could be material.
The concern is whether these errors are ‘material’ under CEMA 1979, s 167(3), which imposes criminal liability for materially untrue VAT returns. While not triggering anti-money laundering reporting, historic errors could accumulate. So, what should an adviser do – resign, report, or toast HMRC at the next bash?
Query 20,629– Party Pooper.
Portfolio career
I have a client who has turned her hand to various activities over the years, some sequentially, some simultaneously. I have generally lumped all the income and expenses together on her tax return as a single trade of ‘trying to earn money’ – currently described as ‘film editor, herbalist and carer’, which covers all the sources for which she is paid. I note that the HMRC form asks ‘how many sole trades are carried on’, which suggests that they would like these all to be reported separately, but that seems unnecessarily complex when the amounts are relatively small. She has now started yet another activity, and I am wondering whether I should account for it separately or continue the practice of the past. The new activity might make a loss in the first year or two but is commercial enough to qualify for ‘sideways relief’ – so treating it as part of the same trade should not make any significant difference.
Readers’ views would be welcome.
Query 20,630– Magpie.
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