ARE SPOUSES WAGES FULLY DEDUCTIBLE?

HMRC have recently won a tax tribunal case where they were seeking to challenge the deduction for a wife’s wages in arriving at the profits of her husband’s business. The judge agreed with HMRC that the amount allowed as a deduction should be limited based on the hours spent and appropriate rate for the work done.

The general principle here is that the expense must be incurred wholly and exclusively for the purpose of the trade. Traditionally when the personal allowance was fairly low (e.g. £6,475 in 2010) it was quite easy to justify the wages paid to the spouse at around that level. However, there have been significant increases in the personal allowance in recent years to £11,500 in the current tax year and it is important that wages paid to the spouse can be justified.

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VAT REGISTRATION FOR OVERSEAS RUN COMPANY

Mr Smith has set up a new UK company to supply business consultancy services; however, the company will have no UK trading presence.  Mr Smith lives in France and will run the business from his office there.  Most of the customers will be in the UK as Mr Smith has a number of contacts here through his former roles.  As Mr Smith will be visiting his customers in the UK frequently and will often stay for a few days in hotels can the company VAT register to recover the UK VAT it incurs?

If the company has no business establishment or fixed establishment in the UK but has an establishment elsewhere, the supplies would be made from that establishment; in this case, France.  In this situation, as the services are being received by the UK customer from a supplier belonging outside the UK the customer is deemed to be making those supplies under VATA1994 section 8 and would account for them using the reverse charge mechanism.  As a result, your client would be making no taxable supplies in the UK and consequently would not be entitled to register.

If the company is VAT registered in France it would be entitled to use the EU refund scheme to recover UK VAT incurred when here on business.  The relevant VAT notice is Notice 723A.

CGT Investors’ Relief

A client has recently sold his family company, realising a significant gain and using all of his Capital Gains (CGT) Tax Entrepreneurs’ Relief lifetime allowance in the process.Although he has stepped back from active involvement, he is considering investing a significant amount of money in a trading company and has told me he would like to ensure that he benefits from a 10% CGT rate when he sells this. Is this possible?

CGT investors’ relief, introduced in Finance Act 2016, allows for a separate, additional £10 million of lifetime allowance on the sale of qualifying shares in a trading company. The rules are somewhat complex, but potentially provide a favourable rate of CGT for an investment that may not, for instance, qualify for the various tax incentives under EIS/SEIS or Entrepreneurs’ Relief.

The relief applies to ordinary shares subscribed for on or after 17 March 2016, in an unquoted trading company or holding company of a trading group, where the shares are held for a minimum 3-year period prior to disposal.

The relief will generally not apply if either the investor or someone connected to them is either an officer or employee of the company invested in, or another company connected to it (the ‘relevant employee’ restriction).

That said, it is possible for an unremunerated director of the company invested in to avoid the ‘relevant employee’ restriction if, prior to making the investment, neither they nor any person connected to them were either connected to the company or involved in the carrying on of its trade.

Furthermore, an unremunerated director would be able to receive dividends, interest (arising on a loan to the company) and a reimbursement of business expenses from the company without breaching this condition.

In addition, it might be possible for trustees to claim relief if a qualifying life tenant met these requirements.

It’s Christmas Party Booking Time…

It’s getting to that time of year again, (whether some of us like it or not!) where businesses are looking to plan their Christmas parties.

HMRC make one small concession to aid the ‘improvement of staff morale’. A business can spend up to £150, per head, on an ‘annual event’ such as a Christmas party, providing the following conditions are met:

  • The event must be open to all staff
  • VAT can only be reclaimed on the costs that relate to employees/directors of the company
  • The £150 is an annual limit, so if you have more than one event per year, you need to keep a close eye on the total costs incurred in that year
  • If the costs  exceed £150, the WHOLE cost becomes a Benefit in Kind, for the employee
  • you have to actually hold the event and keep the appropriate supporting evidence, as normal. Remember, this is not an allowance, so you can just withdraw £150!

It is also worth noting that a guest of an employees can be included in the head count too!

For further information, please visit https://www.gov.uk/expenses-benefits-social-functions-parties/what-to-report-and-pay

VAT – DIY CLAIM BY BUILDER

Joe Bloggs is a sole proprietor builder who owns land on which he is intending to a build a new house for his own occupation.

Joe does not want to wait until the property has been constructed and a completion certificate been received in order to claim the VAT using the DIY Refund Scheme.

As a sole proprietor Joe is VAT registered for his building services business and he has asked if he could purchase the materials through the company and claim the VAT back and charge himself a zero-rated fee for the labour which has been marked up to reflect the costs incurred on the materials and labour.

In order for an individual to reclaim VAT on costs incurred on constructing a new dwelling for his own occupation the DIY refund Scheme is the correct method.

The DIY Refund Scheme allows a person to claim the VAT back on building materials purchased when a new house has been built for occupation by themselves or their relatives and is not to be used in the course of furtherance of any business activity such as for sale or renting.

Prior to 01 January 2011 a sole proprietor (or partnership) who built a house on his own land for his own occupation had the choice of recovering the VAT through the VAT return or making a claim via the DIY refund Scheme.

However, after 01 January 2011 this option is no longer available. HMRC’s manual VCONST24350 states that it is only possible to recover VAT through a VAT return to the extent that the services and materials will be used for taxable business purposes. As such the only way for your client to recover the VAT is by making a DIY claim for the cost of materials and this should be made as one claim within 3 months of completion.

10 Pitfalls When You’re claiming CGT PPR

Everyone is aware that one of the most generous reliefs available, at a time when the Government is constantly seeking ways to increase the tax take, is Capital Gains Tax Private Residence Relief (PRR).  All you need to do is live in a property.  You don’t even have to live in it for the whole period of your ownership, and when you come to sell it, subject to a number of conditions, you don’t have to pay capital gains tax on the increase in value from when you bought it.  And this normally applies whether the gain is £100 or £100 million.

Of course, it’s never that easy when dealing with legislation so here are ten pitfalls which we have come across where home owners have received unexpected tax bills

Too Much Land

The legislation gives you a generous half a hectare (1.235 acres) where HMRC will not question the usage of the garden, but if you exceed that, you may need to apportion the cost.  Of course if you live in a (say) 10 bedroom mansion, the legislation gives you some leeway so that they will allow relief for all of it if the land area is appropriate to the size and nature of the property.

Selling the Land After you’ve Sold the Property

A common issue relates to where you want to keep hold of part of a large garden after you’ve sold your home with a view to selling it to a property developer.  There’s no problem with that part, however, you may be in for a nasty shock when you tell your accountant because the land you retain no longer attracts PRR as, at the point you sold it, it was no longer your home.

Partitioning the Land

You’ve owned your home for a number of years and it has a large piece of land around it (the total area owned is three acres so more than the permitted area of 1.235 acres).  Five years ago, you partitioned 1.5 acres of it because you were contemplating selling it but the deal fell through and you’ve just let the land remain fallow with a 6’ fence partitioning it off from the rest of the garden.  A property developer has just offered you a significant sum for the fenced off land – the only problem is, it’s no longer part of your garden nor is it essential for the use and enjoyment of your property.  You may have to pay capital gains tax on the partitioned area sold.

You’re a Serial Property Developer

In recent years, HMRC has made use of some fairly strong case law when dealing with individuals who move into a property, spend 18 months renovating it, sell it then move into another property to do the same thing. Arguably, what they actually have is a trade and there would normally be no right to PRR on the properties sold.  From the case law, the test concerns “quality of occupation” i.e. have you moved in with your family – does your post go there, do you have furniture etc. HMRC’s problem is picking up these serial developers out of all of the people who might otherwise have fairly peripatetic jobs which entail them moving house on a regular basis.

You Moved Out Temporarily and Never Came Back

PRR reliefs are generous and extend to temporary absences from the property – perhaps for a job move overseas, or to go look after a chronically sick family member. If you eventually move back in, the legislation gives you a theoretical period of deemed occupation of up to 15 years.  However, if you fail to move back in, unless you remain in job related accommodation at the point you sell the property, the most you’ll get is three years additional relief.  However, if you’ve let out your property in your absence, there may be some further relief due.

You Own (and occupy) More than One Home

You can only claim relief for one property as your private residence during any particular period in time (married couples can only claim relief on the same property).  Accordingly, if you own two properties, you might want to consider making an election to HMRC to treat one of those properties as your private residence – usually the one where you are expecting to make the largest gains.  If you don’t, HMRC will look at the factual residence and choose one for you.

Divorce

If one spouse moves out and the other remains in the marital home, provided the outgoing spouse does not file a main residence election with HMRC, if the outgoing partner’s share in the property is eventually sold/gifted to the spouse who remained resident, (s)he can claim PRR for the whole period including the period during which (s)he was not in occupation.  However complex divorces can take many years to resolve and the need for both parties to move on to new lives can trump any potential tax consequences of holding on for a settlement.

You Didn’t Move Straight In

You live in rented accommodation but you’ve purchased a renovation project which will take 8 years of your weekends and evenings to complete and which you intend moving into once the Grand Designs Team have finished filming.  Sadly, none of that 8 years will qualify for PRR as the concession only gives you 12 months as of right and an additional 12 months for circumstances where you are prevented from moving in which are beyond your control. NB – this is an all or nothing concession so if you exceed the 24 months, essentially you get no relief for that 8 year period.

Most of The Property Is Used for your Business

You own a four level property, and two levels house your business where six employees attend each day during your period of ownership.  You can’t claim relief on the whole property even though you and your family live on the other two levels.  However, you may be able to claim rollover relief or possibly entrepreneurs relief on the business proportion dependent upon the circumstances.

Inadequate Proof that a Property has been Rented Out

It is possible to get PRR if you leave a property for whatever reason and rent it out.  The relief is limited but, under average circumstances can still be valuable.  However, it remains incumbent on the owner to actually prove that they rented a property out during the period of ownership and, if the period of rental was (say) a decade ago, such proof may be hard to find.  Accordingly, it is important to retain records such as rental agreements to demonstrate that the criteria for the additional relief have been met.

REPLACEMENTS BASIS FOR RENTAL BUSINESSES

We have various clients who receive rental income from residential lettings.  We have been asked to remind them of the change to the relief for “wear and tear” allowance and the renewals basis for expenditure within their properties, and particularly how these differ for corporate landlords?

With the exception of furnished holiday lettings, capital allowances are not available for the cost of capital items used within a dwelling let out residentially (s.35 CAA 2001).  Prior to 6 April 2016 (1 April 2016 for companies) such taxpayers could only claim relief based on the “wear and tear” allowance at a rate of 10% of gross rents to give a measure of notional relief for the provision and replacement of such expenditure.

From 6 April 2016 the wear and tear relief is replaced by a standard “Replacement Domestic Items relief” (s.311A ITTOIA 2005 for noncorporate taxpayers, with mirror provisions for companies under s.250A CTA 2009). The key points of the new rules are summarised below:

  • Relief is only available on the replacement of an existing item, and not therefore on the initial purchase or the purchase of existing white goods, furnishings etc with a building
  • If there is a sale or part-exchange of an old item, the consideration or discount received is netted-off against the allowable cost of the new item
  • The legislation contains a rule that restricts expenditure on the new item, if not “substantially the same” as the old item being replaced, which would limit the relief to the cost of an equivalent “old” item. This would apply, for example, on replacement of a refrigerator for a significantly larger model needed to cope with an increased number of tenants within a building.

Relief under these rules is not available for furnished holiday lettings, where capital allowances would generally be available (s.311A(7) ITTOIA 2005,   s.250A(7) CTA 2009).

The new rules apply to expenditure incurred on or after 1 April 2016/6 April 2016 for companies and non-company taxpayers respectively, with the “wear and tear” allowance ceasing to be available on that date accordingly.

For companies with an accounting period that straddles 31 March 2016, the period is split into two separate notional periods with profits being split accordingly between the pre and post 31 March periods. This is done by default on a time apportionment basis although a different apportionment may be claimed on a just and reasonable basis. Relief under the new rules then applies to the pre 31 March profits under the old rules, with “wear and tear” available if applicable, and post 31 March replacements basis available for qualifying expenditure incurred after that date –

Example

“Proper T Ltd” has the following results for its furnished residential property business for the year ended 31 December 2016: £
Rental profits (before “wear and tear” or “replacement items” relief) 75,000
Expenditure incurred on qualifying “replacements”:  pre-1 April 2016 £8,000, post 31 March 2016 £12,000
Profit relating to period 1/08/15 – 31/03/16 (243 days) 49,931
Less – Wear and tear relief (10%)  (4,993)
Net taxable profit to 31/03/16 44,938
   
Post 31 March 2016 profits (122 days) 25,069
Less – relief under new “replacements” basis       (12,000)
Net profit from 01/04/16   13,069