VAT Registration on purchased businesses

A new client, a husband and wife partnership, which was set up to acquire a dry cleaning shop as a going concern and at the same time to buy the goodwill and customer list of a clothing alteration business.

 In the 12 months prior to the transfer the turnover of the dry cleaning business was £55,000, whilst the clothing alteration business only turned over £35,000 and neither were VAT registered.  The partnership has been trading for three months without registering for VAT and I am concerned that because the combined turnover of both activities exceeds the VAT registration limit they should have notified HMRC and been registered from day one.

The law governing the requirement to register for VAT following the transfer of a going concern is contained within Section 49(1) VATA 1994 and depends on whether the seller was a “taxable person”; that is either VAT registered or required to be.

If you acquire a business as a going concern from such a taxable person who was trading above the VAT registration limit, then as the purchaser you are required to VAT register from day one of the transfer. If you acquire a business from a taxable person who was registered voluntarily, that is below the registration limit, you have to treat yourself as the person carrying on the business both before after the transfer and continue to monitor the turnover on a rolling 12 month basis to determine if and when you should register.

However, in the case of the client, if you acquire a business from a person who was neither VAT registered nor required to be registered, you get a fresh start and would begin to monitor your turnover on a 12 month basis beginning on the day of the transfer and not before. This applies if you acquire separate businesses from unconnected sellers, even if the combined turnover of the previous 12 months trading would be above the VAT registration limit.

Can I sell my garden for development, tax free?

Can I sell part of my garden for development free of tax?

This concerns the “principal private residence” (PPR) relief from capital gains tax. The relief is given against gains arising on a disposal of a dwelling-house or part of a dwelling house which is or has at any time been an individual’s only or main residence. It is also given against gains arising on a disposal of land which the taxpayer has for occupation and enjoyment with that residence as its garden or grounds up to the “permitted area”. This means PPR relief may be available on a sale of part of the garden without a sale of the house but in other cases the occupation condition might pose a problem. The house merely needs to have been occupied by the individual at some point during ownership but the garden has to be occupied with the house at the time of the disposal. Because of this, if part of the garden is retained following a disposal of the house then a subsequent gain arising on a sale of the part retained will not qualify for relief.

The permitted area referred to above is 0.5 of a hectare (including the house) but can be a larger area if it is required for the reasonable enjoyment of the dwelling-house as a residence having regard to the size and character of the dwelling-house. A gain arising on a disposal of part of the garden or grounds out of the permitted area can qualify for relief but HM Revenue & Customs are likely to challenge a claim for relief on a part disposal out of garden or grounds which exceed the permitted area. HMRC’s published view is that where there is such a disposal it may be prima facie evidence that the part disposed of was not required for the reasonable enjoyment of the dwelling-house as a residence so the conditions for relief are not all met. HMRC do however give two examples of when such an inference might not necessarily be correct; the first is where the disposal is to a family member and the second is where the disposal is made for reasons of financial necessity.

Garden or grounds in excess of the permitted area are not the only source of potential difficulty. Other problem areas include plots of garden or grounds which are somehow separate from the main plot and buildings which are separate from the main house. As with all valuable tax reliefs, traps for the unwary exist and great care must be taken to prevent relief being denied.

VAT on garage converted to a dwelling…

A client has acquired a large house with a detached garage. He intends to live in the house but would like to convert the garage into a separate dwelling and sell it. Please can you confirm that the sale will qualify for zero-rating as a non-residential to residential conversion and therefore that my client will be able to register for VAT to recover the input tax incurred on the conversion costs?

You are correct in thinking that the first grant of a major interest (freehold sale or lease of more than 21 years) in a dwelling that has been converted from a non-residential building can be zero-rated, thus enabling a business to register for VAT and claim full input tax recovery on the costs.

However, to qualify as a non-residential conversion the building being converted must never have been used as a dwelling or for a relevant residential purpose; or if previously residential, in the 10 years immediately before the sale, not have been used as a dwelling or for a relevant residential purpose.

The conversion of a garage, which has been occupied together with a dwelling, into a building designed as a dwelling is thus not a non-residential conversion unless the dwelling in question has been empty for 10 years or more. The legal reference is Note 8 Group 5 Schedule 8 VAT Act 1994 which states: “References to a non-residential building….do not include a reference to a garage occupied together with a dwelling.

This means that if a non-residential conversion has not taken place the sale of dwelling will be exempt from VAT. If your client does not make any other taxable supplies your client will not be able to register for VAT. If your client does make taxable supplies he will be able to register for VAT but the input tax will be non-recoverable unless it falls within the partial exemption de-minimis limits.

VAT Opt to tax on surrender of a lease

A client has recently purchased a commercial property with an existing tenant. The vendor had not opted to tax and so the sale was exempt from VAT. The client intends to extensively refurbish the building and so has opted to tax his interest in the property. I have just discovered that he has agreed to accept the surrender of the lease from the tenant for a payment of £200,000. What are the VAT implications of this payment?

The supply by a landlord of accepting the surrender of a lease upon payment from a tenant is known as a reverse surrender and is seen as a grant of an interest in, or right over, land (VAT Act 1994 Schedule 9 Group 1 Note 1). Such a supply is exempt from VAT unless the person making the supply has opted to tax the property in which case it is standard rated.

In this client’s case therefore, it depends on whether the payment for the reverse surrender was received before or after the option to tax was put in place as this will determine whether it is an exempt or a standard rated supply. If the payment was received before the client opted to tax the payment is exempt from VAT but if the payment was received after they had opted to tax it is standard rated.

Letting to a relative below market rate?

A client has bought a flat which is being let to her son. He has recently started his working life in a relatively low paid job, so she is helping out by charging him less than market rent and, as a result, expects her mortgage interest and other expenses to exceed the rents received.

What options are available to her for tax relief on the losses?

In order to be deductible from rental income for tax purposes, property business expenses must pass the familiar test of being incurred “wholly and exclusively” for the purposes of the business. HM Revenue & Customs take the view that if property is let at less than market rent to a relative then the related expenses are incurred partly for benevolent or philanthropic reasons so fail the wholly and exclusively test. Strictly speaking, this means that no expenditure ought to be allowed as a deduction against the rental income but HMRC will allow a deduction up to the amount of rent received for the property. This means the client will not be liable to tax on the income from her son but it also means she will not have a loss eligible for tax relief.

Stamp Duty Land Tax – ‘Major Interest’ Questions

Q> I note that the higher rate of stamp duty land tax on the purchase of additional dwellings only applies to the acquisition of a major interest. Does this mean the higher rate does not apply if I buy only a 49% share in a property? How is the tax charged if I arrange to buy 100% of a dwelling in separate tranches, each less than 50% and each less than £40,000?

A> An interest in or over land can take many different forms and does not necessarily have to be an interest in the whole of the property. The term major interest is used here to denote a freehold or a lease which had more than seven years to run when granted. The word major is not a reference to the size of a proportionate holding. So the higher rates of tax will apply to the acquisition of a 49% share in a property if all of the other conditions are met.

Buying the property in a series of small tranches will not avoid the higher rates because of the linked transactions rules.