Outside Appointments

The liability to VAT of payments made to professionals relating to outside appointments depends on various factors, says A ST J PRICE.

BIRKETTS (17515) COULD BE very helpful to professional partnerships and sole practitioners, who have income from outside appointments', I observed. 'It suggests that Customs may be wrong if they say that the fees for serving as, for instance, a non-executive director of a National Health Service trust, are standard rated.'

'Surely, it is the great and the good who get such jobs, often in retirement, rather than active professionals?', responded the Busy Practitioner.

'Not necessarily. Birketts was a sizeable provincial practice with 19 partners. Seven current and past partners and one employee held or had held positions as non-executive directors of health service trusts, of a building society, as legal adviser to the British Beekeepers' Association, as a part-time chairman of the Insolvency Practitioners Tribunal and as Clerk to the General Commissioners of Income Tax. The fees were paid into the partnership and dealt with as part of the pool of income. Partnerships often require that fees received by their partners for outside appointments are paid into the business in recognition of the partnership time spent by the individuals.

'Customs argued that the fees were payment for a standard-rated supply of the services of the individual by the partnership. They say in leaflet 700/34 Staff that there is a standard-rated supply if an appointment results from and involves the use of the professional expertise, which a partner or an individual exercises in the professional business. Note that they use the wording "professional services" and "business" rather than "practice", so a wide range of situations could be caught, not just the traditional professional practice, such as that of a lawyer or an accountant.'

'So you mean that I have to charge VAT if I act as the treasurer of a local club?'

'If it pays you, probably you do, because you will be using your expertise as an accountant.'

'But suppose it is just an honorarium?'

'I doubt if it makes any difference. That you are only entitled to payment if the committee votes it rather than as of right, does not make it any less a payment for the work you have done.'

'Well, suppose I put it in my private account?'

'Income of your practice does not escape tax just because you put it in a different account, now does it? Partners are better off because, if they bank the money as individuals rather than through the partnership, it belongs in a separate legal entity for VAT purposes. If the fees are significant, perhaps the partner's share of the profits can be adjusted.

'The sums received for most voluntary posts held by sole practitioner accountants are small, but there must be a problem as they are likely to involve at least some accountancy.

'In the Birketts case, the tribunal held that fees from non-executive directorships of health service trusts held by partners were not subject to VAT, because the individuals had been appointed on the grounds of their personal merit, occupational skills and standing in the community as distinct from professional expertise. Therefore, they had not been accepted in the course or furtherance of their profession as solicitors.

'In contrast, a directorship of a building society was so held because the partner was expected to provide the experience of a property solicitor and to keep the board up to date on conveyancing practice. Since the fees from the building society were paid into the partnership as compensation for the time spent on the appointment and were treated as income of the practice, they were received in the course or furtherance of the partnership business.'

'What about the beekeepers?'

'As the post was of legal adviser, this would have been caught if Customs had not accepted that the individual was an employee of the association, income tax having been deducted from the honorarium.'

'So, when a prominent local professional accepts an outside appointment, he should get the reasons put in writing and minimise the expected input of professional expertise?'

'That might well help. Note also that the Birketts decision says that Customs accept that part-time judicial appointments, for example as a chairman of the Insolvency Practitioners Tribunal, a member of a VAT tribunal or as a Clerk to the General Commissioners of Income Tax, are outside the scope of VAT.'

'So what do I tell my company clients about outside directorships?'

'If fees for a directorship of company A are paid to company B, rather than received by the director personally, Notice 700/34 Staff says that they are payment for a supply, except where B has a legal or contractual right to appoint the director, as with a subsidiary or a company in which it holds an investment. However, the leaflet is inadequate on that point. It is based on the proposition by Customs that a company cannot sell the services of one of its directors to another company of which that person is also a director, since he already has responsibilities to the second company in that role. However, it does not clarify the difference between acting as a director and providing specialist expertise such as, for instance, on computer systems. I established in The Withies Inn Ltd (14257) that there is a difference.'

A St J Price FCA is a VAT consultant in Gloucestershire and author of VAT in the Tolley's Tax Essentials series. He may be contacted on 01285 851888; fax: 01285 851889; e-mail: asjprice@aol.com.

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