News added on 14.02.2017

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Non-business income

The business or non-business dilemma

VAT is only payable on income that is earned while carrying on a business. So why does HMRC sometimes seek to reclassify non-business income as relevant to a business or vice versa, and how can you help your clients avoid a problem?

You should review your clients’ income streams regularly. Ask them to notify you of any one-off sources of income ahead of invoicing so that you can scrutinise the VAT treatment carefully.

As a separate issue, don’t forget that non-business income is excluded from the VAT returns in Box 6 (outputs) in the same way that (for example) loans and wage payments are excluded from Box 7 (inputs).

As an example, charities and non-profit making organisations would exclude donations they receive from benefactors. This income is outside the scope of VAT altogether and not related to any business activity.

It is possible for one-off income to be attributed to your client’s business, even if it is for something unrelated to their day-to-day activities. This has been reinforced by case law, so ensure you scrutinise any unfamiliar income streams to check if VAT needs accounting for, preferably before an invoice is raised.

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