During late November early December we are due the
Chancellors Pre-Budget Report. We can expect announcements
that will no doubt change elements of the UK tax system and
whilst we do not intend to speculate on what might happen,
we will of course keep you informed.
This month we have included information on VAT for owners
of Holiday Let Property, the tax consequences of loans to
directors, the green agenda for cars and vans, and finally
a couple of tax pointers for owners of commercial property
who let to a trading business.
Our next monthly tax update will be sent out on Tuesday 6th
November - be sure to check your inbox.
VAT and Holiday Let Property
There are a number of well known tax advantages
for the owners of UK furnished and let property that has been
classified as a "Holiday Lets Property" by the Revenue. A
major tax advantage is the treatment of rents received as
trading income.
For example this would ensure that losses sustained in letting
the property can be set off against other income, and that
surplus rents count towards earnings for pension purposes.
There are, however, VAT considerations which should not be
overlooked.
The letting of holiday accommodation is generally a standard
rated supply. If the property owner is already registered
for VAT as a sole trader, then such letting income will be
subject to VAT.
If the property is owned jointly by a married couple or other
partnership that is already VAT registered, then again relevant
letting income will be subject to VAT.
If the property owners are not already registered for VAT,
these gross rents received from all properties owned by the
same person or partnership count toward the VAT registration
limit - currently an annual turnover of £61,000.
If such rents, together with any taxable turnover from other
business interests, exceed the threshold, the owner(s) will
need to register for VAT and charge VAT at 17.5%.
It would be difficult to argue that the takings were not business
income for VAT purposes, as this would involve claiming that
this was not a business activity. Such a claim would certainly
undermine the favourable tax treatment.
Loans to Directors of small companies
Small company accounts often show an overdrawn
position on directors loan accounts. Technically a company
cannot loan funds to a director, this is a breach of the Companies
Act. Fortunately, for private companies, this apparent breach
of the law is not subject to criminal sanctions.
Where the amount of the loan exceeds £5,000 it is good practice
to get the written permission of the shareholders to the granting
of the loan - unless the director is also the sole shareholder.
The loan will have a number of tax consequences. Two are highlighted
below.
S419 Corporation Tax
If a small company had loaned say £10,000 to a director and
this amount was unpaid at the year end, 31 December 2006,
then an additional corporation tax charge could be created.
Whether the tax would fall due depends on when the loan is
repaid.
If the loan is unpaid 9 months after the year end, 30 September
2007 in the above example, the Revenue would issue an assessment
based on 25% of the loan, £2,500, which would be payable on
the 1 October 2007. This is not a permanent loss of revenue
for the company as a claim can be made to have this £2,500
refunded when the loan is paid back to the company. Unfortunately
the refund of tax will be delayed until the due date for corporation
tax in the trading period in which the directors loan was
repaid.
In our example above if the loan is paid back in full on the
30 November 2007, and as this is after the 9 month cut off
(30 September 2007), the additional tax would have to be paid
on the 1 October 2007. As the directors loan was cleared in
the trading year to 31 December 2007 the refund of £2,500
would not be forthcoming until the 1 October 2008.
This provision applies to all loans outstanding at the accounting
year end, even those under £5000.
As you can see from this example the timing of repayments
of the loan is critical.
Directors' personal tax
The grant of a loan by the company to a
director is deemed to benefit the director and not surprisingly
the Revenue will want their pound of flesh.
There are two possible outcomes.
1. If the company charges the director interest for the term
of the loan the Revenue will not seek to assess the director
for any additional benefit. The rate of interest charged must
be at least the official rate of 5%. This will increase the
company's taxable profits by the amount of the interest and
will of course increase the amount that the director has to
pay back overall.
2. If the company does not charge interest or charges at less
than the 5% official rate, the Revenue will assess the deemed
shortfall in interest, which they consider should have been
charged, as a benefit in kind. This will need to be returned
on the form P11D at the tax year end. The current rate of
interest applied is 5%.
Please note loans to individual directors that do not exceed
£5000 at any time during the relevant year will not attract
a benefit in kind charge.
Cars and Vans – the Green Agenda
As you will see from the comments made
below, there are currently a number of incentives to buy and
use low emission cars. There are also a number of disincentives
to discourage private use of company vehicles.
100% Capital allowances for very low emission cars
This 100% first year allowance was introduced in the 2002
Budget, and lasts until 31 March 2008. The allowance is 100%
on the cost of new cars which emit at no more than 120 g/km
of CO2, or are electrically propelled.
Benefits in kind on very low emissions cars
In the 2006 Budget, the Chancellor announced that
from 2008/09 very low emission cars, those with emissions
of no more than 120g/km would attract only a 10% of list price
benefit in kind charge, rather than the rate currently applying,
which would be 15% for petrol models, and 18% for diesels.
Capital allowances on expensive cars
The Government is likely to announce a change in the way capital
allowances are given to businesses that buy expensive cars.
The changes will probably include:
* linking the rate of allowance given to the CO2 rating of
the car – expensive cars tend to have higher CO2 ratings.
* expensive cars will be "pooled". In this way tax advantageous
balancing allowances when the vehicles are sold will no longer
be available.
For both these reasons it is likely that the new system
will act as a disincentive for businesses to buy and run expensive
cars. Please note that "expensive" for these purposes means
costing over £12,000!
Company Vans - from 6 April 2007
Don't forget that from the 6 April 2007 company van drivers
who are allowed private use will see a swingeing increase
in the benefit in kind tax charge.
Presently van drivers (vehicles under 4 years old) will only
suffer a benefit charge of £500 per year to cover private
use. From next year this will increase to a benefit charge
of £3,000, plus £500 for free private fuel.
We may be coming to a watershed in the way in which relief
is given and tax is charged for the use of company vehicles.
Now would be an opportune time to review this area and create
a new strategy - please call if you would like to discuss
this.
Personally owned properties used in someone else's
trade
The notes that follow point to some of the tax consequences
if you personally own a commercial property that is used by
a trading business.
1. Capital Gains Tax on sale.
As long as the property is let to an unlisted trading company,
(could also be a sole trader or partnership if let after the
5 April 2004) it will be classified as a business asset for
taper relief purposes. Potentially higher rate tax payers
may only pay 10% tax on sale if the property is owned for
more than 2 years. Don't forget that if you let the property
to a sole trader or partnership before the 6 April 2004 this
earlier period up to the 5 April 2004 will complicate the
calculation of the final capital gains tax bill - owners in
these circumstances can expect to pay more than 10% tax on
a subsequent sale of the property.
There are no restrictions on this favourable tax treatment
if the owner charges rent for the use of the property.
2. Owner's income tax status.
Any rents charged by the owners, less allowable costs, interest
charges and in some cases Industrial Buildings Allowances,
will be subject to tax.
If the property is provided rent free this may result in the
loss of tax relief for costs met by the owner.
Tax Diary October/November 2006
1 October 2006 - Due date
for corporation tax due for the year ending 31 December 2005.
19 October 2006 - PAYE and NIC deductions
due for month ending 5 October 2006. (If you pay your tax
electronically the due date is 22 October 2006)
1 November 2006 - Due date for corporation
tax due for the year ending 31 January 2006.
19 November 2006 - PAYE and NIC deductions
due for month ending 5 November 2006. (If you pay your tax
electronically the due date is 22 November 2006)
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email are intended to inform rather than advise. Taxpayers'
circumstances do vary and if you feel that tax strategies
we have outlined may be beneficial it is important that you
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