Do accountants charge VAT?
Accounting fees must be paid by a business in order to have its annual accounts and tax calculations done. These are valid business expenses, and the accountants charge VAT as is usual and any imposed VAT may be reclaimed in the typical manner. However, if the accountant frequently does tax work for the business's owners, partners, or directors, such as preparing personal tax returns.
Can the VAT on these expenses be recovered if they genuinely belong to the person and not the company? Let’s find out…
Advise and Guidance for Partnerships or Sole Proprietorships
The accounting expenses for a sole proprietorship or partnership typically involve a variety of services rendered by the accountant. Income tax guidance will presumably be offered in addition to standard accountancy and VAT assistance. Despite the fact that income tax is absolutely not a company problem and is instead the duty of the single proprietor or partnership as an individual, HMRC has agreed to enable the business to collect the VAT on these expenses. The major purpose of this is to prevent arguments over insignificant amounts of tax.
The sole exception to this rule is where the accountant's fees are obviously related to tax issues that have nothing to do with the activities of the VAT-registered business. For instance, a business partner can be subject to large inheritance tax fees. Input tax should not be claimed because this is not typically related to the VAT registration. However, tax advice provided to a sole proprietor or a partnership can typically be considered wholly business-related.
Personal Advice Guidance
Regarding limited companies The costs of receiving personal tax advice are negligible, according to HMRC. The costs for inheritance tax, for example, are more important or obviously personal and should be handled in the same manner as any other director's private expense that is covered by the firm. The advise is not given to the business and is not used by the business. Therefore, there is no claim to add VAT. Businesses will occasionally agree to foot the bill for staff who have relocated here for work to get the UK tax guidance they need. HMRC acknowledges that the VAT is recoverable and that this is an appropriate business expense.
There is no true legal basis for it, thus you must keep in mind that HMRC only permits recovery of VAT in these situations by concession. It might decide against allowing VAT recovery since the sums are so large. HMRC will grant your company a concession to recover the VAT if it pays for personal tax advice, but only if the sums are modest. Advice that is obviously unrelated to the operations of the firm will likewise not be recovered.
In most cases, the following accountant fees are tax deductible:
- preparing accounts
- making tax calculations and accounts available to HMRC
- settling tax obligations with HMRC
This is consistent with HMRC's internal guidance, which outlines their regular operating procedure.
What is not permitted?
Accounting costs that have not been incurred solely for commercial purposes are not acceptable. For instance:
- fees associated with creating capital gains calculations. See here for further information on permitted expenses for capital gains tax.
- the price of compiling a partner's or individual's personal tax return or tax computation.
When the charges are reasonable and don't include calculating the tax liability on trading gains, HMRC typically permits additional personal expenses. Where this expense is borne by your firm, as we previously stated, this might be a troublesome area.
What about handling charges for an HMRC inquiry?
Tax relief is available for accountant fees associated with an HMRC investigation. These would only be permitted, though, if the results of an investigation did not alter profitability. Additionally, any costs related to resolving an HMRC investigation where profits are adjusted without being the consequence of negligence, fraud, or carelessness are also allowed. If an HMRC investigation finds errors as a result of your negligence or criminality, any fees you incur as a result are not acceptable. The HMRC instruction on this states that. Unfortunately, even when they are incurred as a consequence of a successful appeal against HMRC, legal fees are not tax deductible.
What about insurance for fee protection?
In general, the premiums paid to protect against the professional costs of an inquiry are only permitted if the professional costs are deductible as a whole. The premiums paid for the policy are not allowed if the policy entitles the holder to reimbursement for the costs of negotiating increased tax liabilities as a result of negligent or intentional errors. The premiums may be permitted because many policies do not allow claims for negotiating additional responsibilities brought on by reckless or intentional behaviour.
Do accounting fees qualify for VAT reimbursement?
HMRC's internal guidelines state that their policy is to permit VAT on a sole proprietor's or partnership's accountancy fees. Only in cases where fees are blatantly unrelated to the VAT-registered firm will there be an exception. This lenient policy is intended to prevent disagreements about insignificant tax amounts.
HMRC maintained that the VAT on personal tax returns in a legal partnership was not reclaimable since the amounts in question were not small amounts in this landmark tax case…
Mundays LLP v. HMRC TC02374. The partnership appealed, but it was unsuccessful. The Tribunal determined that HMRC's favourable handling of tiny amounts was not an accurate portrayal of the law but rather a concession made in order to prevent legal conflicts over insignificant amounts. In this instance, personal tax counsel cost £20,000.
The portion of the partnership's tax advisers' fees linked to the creation of partners' individual tax returns as well as their personal tax calculations and payments were not eligible for a VAT deduction. Given that the VAT in this case was rather significant, it's possible that the partnership's case was unsuccessful. Therefore, it seems sense to ask your accountant to split your charge in order to prevent receiving an unexpected Income Tax or VAT bill. It should be clearly apparent what is related to personal tax and what is related to commercial activity.
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