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bigduckontax
bigduckontax, Accountant
Category: Tax
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I am undertaking some consultancy work least two companies

Customer Question

I am undertaking some consultancy work for at least two companies for the next year. This income will exceed the VAT threshold. I want the work to be billed by an unconnected company (C) which has an established business (recruitment business). I am not a director or shareholder in C. I will not be paid remuneration by C. I have ongoing litigation with a former employer. I have asked that my legal fees are invoiced to and paid by C. I am prepared for C to enter into an arms length commercial agreement with me such that C will be reimbursed (with premium) in the event that my litigation is successful.
1. If C pays my litigation costs and I am not an employee or director of C, will this be taxable?
2. Can C claim the VAT on the legal fees as input tax.
Submitted: 1 year ago.
Category: Tax
Expert:  bigduckontax replied 1 year ago.
Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question. This matter is summarized in HMRC Advice VATSC92100 viz: 'However, there are other circumstances where the payment of costs by a third party is regarded as consideration for the supply for VAT purposes. One specific example of such a situation would be where a transaction obliges one party to be responsible for the costs of the other relating to that transaction, in which case payment will be regarded as part of the consideration for the supply (provided the transaction proceeds to completion).' Thus C can reclaim the input VAT. EIM45000 gives the following advice regarding the taxation of the costs: 'Broadly speaking, if third party arrangements are used to provide for what is in substance a reward or recognition, or a loan, in connection with the employee’s current, former, or future employment, then an income tax charge arises.' There is thus a possibility that the provision of assistance by C could be construed as income and thus liable to Income Tax. I do hope that my reply has been of some assistance.
Customer: replied 1 year ago.
Please can you provide some further clarification?1. VATSC92100 provides the circumstances in which the services are outside the scope of VAT. This includes abortive costs paid by C. If the costs are outside the scope, does this mean the solicitor can bill the costs to C with no VAT?
2. In sub para c. It is clearly stated that if the solicitors client (me) is not VAT registered person, the VAT cannot be reclaimed. My reading of this is that there are no circumstance in which the VAT can be reclaimed?
3. The words 'a possibility' is a bit vague. Is it possible to find an arrangement that is not taxable I.e where I am not an employee of C?
Expert:  bigduckontax replied 1 year ago.
Yes, it does, this will resolve the whole problem. If, however, the solicitor insists on raising a standard rated invoice then VATSC92100 is quite clear that the input tax can be reclaimed. That you are not an employee of C puts you in a better position. However, HMRC might still construe the activity as a benefit in kind and tax you on it accordingly.
Customer: replied 1 year ago.
Thank you. For the avoidance of doubt.1. Company C can agree to indemnify my legal costs and in so doing, will be entitled to reclaim VAT billed by my solicitors as an input cost. Where in VATSC92100 is this so clearly stated? What am I relying on?
2. There is a risk that any legal costs paid by C will be treated as part 7A income and will give rise to an income tax charge on me. I would intend to mitigate this by agreeing with C that in the event that the litigation is successful, C will be reimbursed their legal fees paid plus a premium. Accordingly, the indemnity is a commercial arms length transaction and not necessarily a benefit as consideration ( the premium plus my services ) is being offered. In addition, I would not be a direct employee of C.
If my understanding is correct, it strikes me that there is merit in entering into a transaction on this basis. Should I obtain some clear written advice on these lines that I can rely on?
Expert:  bigduckontax replied 1 year ago.
1. This wording:
'there are other circumstances where the payment of costs by a third party is regarded as consideration for the supply for VAT purposes'
2. You have grasped the benefit in kind income possibility. I am of the opinion that your proposal to reimburse C will negate the benefit in kind. However, I would be inclined to seek trusted, local professional opinion on this point.
bigduckontax, Accountant
Category: Tax
Satisfied Customers: 3119
Experience: FCCA FCMA CGMA ACIS
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Expert:  bigduckontax replied 1 year ago.
Thank you for your support.

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