View some interesting and commonly asked tax questions
that crop up on our advice line
My client is a building contractor working on the renovation of an existing 2 storey commercial building. The developer also wants my client to build a new 3rd storey which is to contain separate residential apartments. I know the work to renovate the commercial storeys is standard rated but can my client zero-rate his work in regard to the new upper residential floor?
The majority of your client’s work in regard to the new residential floor can be zero-rated.
However, your clients work on the roof, constructed on the top of the new residential floor, is considered to be relevant to the building as a whole, not just the upper floor. As such your client will need to value the cost of his services of constructing the roof and will need to apportion his charges between being standard rated (where relevant to the commercial part of the property) and zero-rated (where relevant to the residential part of the property).
This is no defined method to use in regard to apportionment but HMRC insist the result must fairly and reasonably represent reality and as long as it does this then HMRC will not usually argue the method. One method of apportionment in this particular case could be as simple as treating 2/3 of the roof as being standard rated on the basis that 2 of the 3 floors of the building are commercial.
Tony Pocock, Qdos Vantage VAT Consultant
4 January 2018
My clients are husband and wife and they jointly own a rental property that qualifies as a Furnished Holiday Let (FHL). I have always split the rental income 50/50 on their Self Assessment Tax Returns despite that fact that the husband is retired and actually spends a greater part of time managing the property. Someone has told me that I can split the profits and expenses on this basis, is that true?
Yes it is, the Property Income Manual on HMRC’s website at PIM4015 explains that where a husband and wife (or civil partners) carry on a business that meets the FHL criteria then the profits or losses may be split in a way that that parties agree.
The legislation in the Income Taxes Act 2007 S386 (1) and (2) states that income arising from property held in the names of individuals who are married to, or are civil partners of, each other, and who live together will for income tax purposes be treated as it they are beneficially entitled to the income in equal shares and this is the case for ordinary rental property businesses.
However, as your client meets the FHL criteria they will be able to split the profits and losses on a different basis in line with the legislation at Income Taxes Act 2007 S836 (3) where it states the treatment under S386 (1) and (2) does not apply in relation to any income within certain exceptions and exception D states:
Income arising from a UK property business which consists of, or so far as it includes, the commercial letting of furnished holiday accommodation (within the meaning of Chapter 6 of Part 3 of ITTOIA 2005).
This guidance goes with the warning that the profits are being split on a commercial basis and not just as a means to avoid paying tax (for example if the husband is a basic rate taxpayer and the wife pays higher rate). In your clients case the husband factually spends more time managing the property so would be able to demonstrate the basis on which it has been split e.g. 75/25 should HMRC make a challenge.
Julie Rose, Qdos Vantage Tax Consultant
14 December 2017
My client has previously been using the Flat Rate Scheme (FRS) but now wishes to change to normal accounting method. He applied to leave with effect from the start of his current VAT period but HMRC have refused this date, advising his leaving date will be the start of the next VAT period. Can my client leave retrospectively?
Case Law shows that Tribunals agree retrospective entry to, and thus by extension, exit from FRS from a date from which no VAT returns have been submitted as from that time the taxpayer has not taken advantage of the purpose of FRS, this being the reduced burden for record keeping and administration.
This is now supported by the wording of HMRC guidance at para 12.1 of VAT Notice 733 which states “HMRC will agree to a date in the previous accounting period if you have not already submitted your return under the flat rate scheme.” as well as HMRC’s online guidance in FRS4100 which states “You should normally refuse an earlier date where the business has already calculated its VAT liability for the period(s) using the FRS accounting method. This is because the FRS exists to simplify VAT accounting and record keeping, so allowing a business to spend less time on VAT.”
As your client has yet to submit the return for his current VAT period you should request that HMRC reconsider the exit date on the basis of their own guidance.
Tony Pocock, Qdos Vantage VAT Consultant
1 December 2017
Is there any tax- exempt limit for S455 CTA2010 tax charge on the director or employee loans made by a close company?
s455 CTA2010 tax charge is applicable when a company gives a loan to its directors or employees and it is not repaid within nine months and one day of the accounting year end. The current rate for the tax charge is 32.5% from 6 April 2016 for all relevant loans made or benefits conferred by close companies.
S455 tax is only due on the new loan, not the total outstanding loan. The charge applies to a debt created or loan made in an accounting period (AP) rather than the total amount outstanding at the end of the AP (although the two amounts may well be the same, particularly in the first AP).
There is no minimum exempt amount for the controlling directors or participators (who owns more than 5% of the ordinary share capital) of a close company. So any loans taken out will be subject to the tax charge if not repaid within the time period.
However, where a close company makes a loan or advance for any purpose to a relevant person who is also a director or employee of the close company or of any associated company, that loan or advance is not within CTA10/S455 if all the following conditions are satisfied:
- the amount of the loan in question plus the outstanding amounts of loans made to the borrower does not exceed £15,000 (Condition A), and
- the borrower works full time for the close company or any of its associated companies (Condition B), and
- the borrower does not have a material interest in the close company or any of its associated companies (Condition C)
When deciding whether the limit of an individual employee has been reached, do not take loans to the spouse into account.
Where both husband and wife are directors or employees, they will each be entitled to a separate limit of £15,000.
Sarfraz Khan – Qdos Vantage Tax Consultant
17 November 2017
My client provides staff in the entertainment industry and is hiring out a DJ for an event to be held in the UK. The invoice is being sent to a business in Dubai, do we charge VAT?
Under the Place of Supply of Services rules when this sale is to a business (B2B) we need to look at where the customer belongs. In this case the business is located outside of the EU and so the supply is treated as outside the scope (OSS) of UK VAT and the sale is shown on the VAT return in box 6 only.
What if the customer is in business but is based in the EU?
If the customer is a B2B customer, then the same rule as above is applied i.e. where does the customer belong. This sale is also treated as OSS but as the customer is based in Europe we apply the Reverse Charge (RC). On the VAT return you show it in box 6 only and you will also need to file an EC Sales list return and use indicator 3 for Services.
What if the customer is an individual based outside of the UK?
Where B2C services are provided for entertainment activities, we look at where the event is being performed. As this event takes place in the UK we treat this sale as standard rated for VAT and show on the VAT return in boxes 1 and 4.
What if the customer is in the UK?
This is a normal standard rated activity in the UK and VAT at 20% is applied on the sale to both B2B and to B2C customers. Show on the VAT return in boxes 1 and 4.
The VAT Notice741A Place of Supply of Services gives more information on this topic.
Annette Woods – Qdos Vantage Tax Consultant
21 September 2017
My client has sold a residential property, it was originally his main residence and then it was let out for a period of time. I have worked out that the private residence relief (including last 18 months) and lettings relief do not fully cover the period of ownership so there is a chargeable gain.
What rate is this charged at as I have read contradictory information, some stating that it will be charged at the rates of 18% and 28% and other that implies the lower rates of 10% and 20% respectively will be charged as it qualified in part for private residents relief?
The gain in relation to your client will be charged at the higher rates in line with legislation was introduced in the Finance Act 2016 Part 4 Section 83 to amend TCGA1992 Part 1 Section 4.
The new CGT rates of 10% and 20% were introduced for disposals on or after 6 April 2016 but do not apply to transactions involving residential property or carried interest. The information publicised by HMRC was ambiguous as it stated:
This measure reduces from 6 April 2016 the 18% rate of CGT to 10% and the 28% rate of CGT to 20% for chargeable gains, except in relation to chargeable gains accruing on the disposal of residential property (that do not qualify for private residence relief). This was interpreted by some that if any element of private residence relief was due the lower rates would apply.
When looking to the legislation the rates are reduced by the words in section 2 being substituted:
(a) in respect of upper rate gains accruing to a person in a tax year, is 18%, and
(b) in respect of gains accruing to a person in a tax year which are not upper rate gains, is 10%
Additionally, there was the insertion of section 2A defining the meaning of ‘upper rate gains’ as:
(a) residential property gains (see section 4BB)
(b) NRCGT gains (see section 14D), and
(c) carried interest gains (see subsections (12) and (13))
When reviewing section 4BB the legislation only talks about a disposal of UK residential property interest, or a disposal of a non-UK residential property interest. It does not differentiate between property that is a private residence or not so the higher rates will apply where a gain is partially covered by private residence relief.
Julie Rose – Qdos Vantage Tax Consultant
My client’s tax question is – I am tax resident abroad and considering the sale of a property in the UK that was previously my main residence. Will I be liable to pay capital gains tax in the UK?
Since 6th April 2015 disposals of residential property situated in the UK are within the scope of charge here.
The capital gain arising can be calculated in one of two different ways. Either the conventional method of consideration received less original base cost, or consideration received less the market value as at 6th April 2015, when the statute changed. For most individuals the market value route will be most beneficial but if that route is chosen then some reliefs are affected, in particular, the principal private residence exemption. The usual relief is determined by a fraction of the qualifying period (actual occupation + final 18 months if appropriate) over the entire period of ownership, when adopting the market value option, both the period of ownership and the qualifying period are deemed to begin on 6th April 2015. Thus, when deciding which calculation to use both methods need to be considered as the movement of the proportionate relief can also affect the result.
It is mandatory for the disposal to be reported on line to HMRC within 30 days of the conveyance if penalties are to be avoided. The penalties are imposed regardless of the ultimate consequence, ie whether the end result is a loss, a gain or a chargeable gain and begin at £100 for an initial lateness with further penalties for exceeding six month and 12 month deadlines. Interest and late payment penalties can also be added. Payment should be made within the same 30 deadline unless the individual is already within the Self-Assessment regime when payment can be made on the normal due date.
The gain may also be subject to charge in the client’s country of residence but depending on the terms of any Double Tax agreement, a foreign tax credit may be available in respect of any UK tax paid. HMRC are currently aggressive with the penalty charge and as clients have a tendency to advise transactions only after the tax year end, it would be wise to make them aware of their obligations before any infraction of the legislation occurs.
Elaine Wood – Qdos Vantage Tax Advisor