Find out what we have been answering for you this month…

 

Q

A client has a company with 5 buy to let properties. He is looking to purchase a commercial office building for £650,000, financed by a 75% mortgage, the rest will come from re-mortgaging one of the buy to let properties.

As this is a different type of let and a relatively large transaction, I was thinking a separate company should be set up for the commercial property? Although it could have a negative effect on CT rates, would it also allow vat registration to be considered?

If there is a separate company, should it be a subsidiary of the existing buy to let company or a second company owned personally by my client? Any newco will need to borrow the deposit from the existing buy to let company.

As I understand it, the proposed purchase is a single purchase of the building, can anything be done with respect to capital allowances?

Are there any other general points to take into consideration?

 

A

You can make an option to tax application for VAT on commercial property. If the seller has already opted to tax there will be VAT on the purchase price so an option to tax would need to be made to reclaim the VAT. If purchased through the existing company there would be into partial exemption and you have standard rated and exempt supplies.

It would make sense to have the commercial property in a subsidiary company which would make the accounting/flow of funds via intercompany loan easier. I think it depends what your client’s intentions are on a future sale. If in a stand alone company the shares in the company holding the property could be sold.

The capital allowances position is more complex and the capital allowances available to a purchaser of a property will depend in part on any allowances claimed by the seller. If CAs already claimed, any claim by the purchaser is restricted to the disposal value brought into account by the seller or a prior owner.

There is also the possibility of a joint election being made by the buyer and seller to fix the value of fixtures and fittings (Section 198 CAA2001). See HMRC Capital Allowances Manual CA26800.

The capital allowances position needs to be part of the purchaser’s due diligence process.

Let me know if you need anything else.

 

 

Q

Background

• Company set up with 75:25 shareholding. Say A & B, respectively . Not related personally, good friends/colleagues – A did most of work initially, but now B working full time alongside
• B has been more recently appointed as director (I advise for BADR potential in future). A always has been
• Now want to go 50:50.
• Both taking directors salary.
• Have been taking disproportionate dividends, based on 50:50 but never been formalised, so looking to sort  ASAP and they have a company law specialist looking at this for them.

 

The questions are…

• • Doing a share transfer – would need to place a value on them and would create a CGT Disposal for A, presumably on market value.  If no consideration took place, no otherwise no problems?
  • To avoid,  an issue of further shares to achieve 50:50 split, whilst no CGT for A, does it create an income tax charge on B (employment related securities – which I know little about), if market value not paid and they only pay at par?

 

 

A

 

I gather that the clients are looking to equalise their shareholding to 50:50 either by way of a disposal by A at an undervalue or a share issue to B by the company. I have assumed both A and B are individuals.

If A gift some shares to B, that would be a disposal for CGT purposes. Even if they are not connected parties, if the transaction is not a bargain at arm’s length, s17 TCGA 1992 would impose market value proceeds. If the company is a trading company, gift/holdover relief under s165 TCGA 1992 might be something to consider. Further guidance on gift relief can be found at HS295

If the company issues shares to B for which B does not pay market value for, this may also create a CGT issue for A under the value shifting rules in s29 TCGA 1992. See CG58850P and on the attached PDF document we have found on Croner-i with additional guidance. If the value shifting rules apply, it may be possible to consider gift relief per above, see CG13230.

In either of the options, whether transfer from A or a new issue from the company, the shares would be employment related securities. An exception would be in the case of a transfer from A, if the transfer is done in the normal course of a personal relationship – see ERSM20220.

Where the shares B receives are employment related securities and market value is not paid, then there will be income tax issues. If the shares are readily convertible assets, there will also be an NI charge. Some guidance on ERS can be found here. The company would also need to comply with the administrative requirements for employment related securities.

The IHT position may also need to be considered in the proposed transactions. Broadly, a gift by A would be a potentially exempt transfer. Where shares are issued to B instead, the value shifting provisions in s98 IHTA 1984 may apply to create a transfer of value for IHT purposes. Some guidance on this is at IHTM04069.

 

 

Q

 

I have a client who is thinking about invoicing their own limited company for their services. This is a company with just one director. The business provides tutoring services and the client wants to invoice their own company (as an individual) for their tutoring services. At this stage they don’t want to physically pay themselves money for these services but rather record it against their director’s loan account.

 

I flagged to the client that there are situations where a director might provide services to their own company on a consultancy basis. It would typically be in cases where those services are separate from their usual director responsibilities and are also provided to other clients, for example through self-employment. However, based on the client’s explanation, it sounds like the work would relate to their usual activities within the company and would form part of its core operations (they provide tutoring service to the clients of their company). So I would see it as part of the director’s role and the business’s core operations rather than independent consultancy and hence this would rather have to be reported under PAYE. I saw there was a case in the past Petrol Services Ltd vs HMRC where the tribunal ruled in favour of HMRC in a similar situation.

I was wondering whether my understanding is correct or whether there are some cases where this would be allowable that can be applicable in my client’s case. The client doesn’t want to put themselves through PAYE and they are convinced that this is an allowable solution so any reference to legislation would be useful.

 

 

A

 

HMRC on their page NIM12011 discuss when a director can provide services to their company in a separate capacity, it will involve a separate established business with other clients, the director does not have this so HMRC are unlikely to accept that this is anything other than PAYE.

For national insurance earnings and earner are defined in SSCBA 1992 s.3 and class 1 liability in SSCBA 1992 s.6

For income tax the rules are in ITEPA2003 s.62 which discusses the meaning of earnings. It would be up to your client to show that the money they got from the company they are a director of is not earnings from an employment. HMRC thoughts can be found starting from EIM00515.

 

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