Tax Questions & Answers

Peninsula Team

November 25 2011

Q. A company director lives in the Midlands, but the company offices are in London.  He sometimes works from home but mainly from the company offices and due to the length of the journey he is provided with accommodation close to the office so that he can stay overnight.  Is this a benefit in kind on him and if it is how do we calculate the charge? 

A. As the director is attending a permanent workplace, a benefit in kind charge will arise where the provision of the accommodation is made by the company.  When travelling to the office he is not attending a “temporary” workplace”.  The fact that he chooses to live a considerable distance from his permanent workplace does not allow tax relief, either for the journey to and from work, or the overnight accommodation supplied.

Where accommodation does not meet the “temporary workplace” condition, then there are three other possible exemption conditions provided by s99 and s100 ITEPA2003 – where:

1) It is necessary for the proper performance of the employee’s duties that he or she should reside in the accommodation; or
2) The accommodation is provided for the better performance of the employee’s duties and the employment is one of the kinds for which it is customary for employers to provide accommodation for the employee; or
3) There is a special threat to the employee’s security, special security arrangements are in force and the employee resides in the accommodation as part of those arrangements.

However, these exemptions are generally for employees only.  They do not apply to directors unless:

a) the director has no ‘material interest’ in the company, and
b) is a ‘full time’ working director and the company is non-profit making or is a charity. (AR 09/11)

Q. ABC Limited trades in the UK and currently owns an intangible asset in the form of goodwill relating to its trade carried on in the UK.  ABC Limited is part of a group with several companies that are UK resident and non UK resident.  The shareholders would like to transfer the goodwill from ABC Limited to another group member who is a non resident group member however they are concerned that this will create a tax liability with regard to the intangible asset.

For the purposes of the intangible asset regime transfers of intangible assets between companies that are ‘related parties’ are normally regarded as taking place at market value. However there is a major exception to this rule. It enables a company to transfer a ‘chargeable intangible asset’ to another member of the same group on a tax-neutral basis.

Companies that are not resident in the UK may be members of a group for the purposes of the intangible asset regime.  But the transfer of an asset between a UK resident member and a non-resident member will not satisfy the ‘chargeable intangible asset’ requirement unless the asset is held for the purposes of a trade carried on in the UK through a permanent establishment in the UK by the non-resident group member.

It may be necessary to consider the transfer pricing rules where intra group transactions involve non-resident companies in circumstances where tax neutral treatment is not available. 

VAT Question’s & Answer’s

Q) My client, a property developer is purchasing a pub with a flat at the top; the flat is not self-contained. They are intending to convert it into two flats for sale. Can you outline the best way for them to maximise their VAT recovery on costs? The pub costs £230,000 plus VAT and the value of the refurbishments are estimated at £80,000.

A) Land and property transactions are renowned for their pitfalls and complexity; the values are often significant and forward planning in VAT can save significant sums. With this project the two main considerations are the rate of VAT charged to the developer and whether or not it can all be recovered.

Recovery is based on the intention to make taxable supplies. The developer intends to sell the flats; the first grant of a major interest (21 years or more) in a new dwelling is taxable at zero rate. Converting a non-residential building into dwellings will qualify as the first grant if it’s never been used as a dwelling before. This is where a bit of pre-planning VAT advice comes in very handy; if the conversion is carried out vertically into a pair of semi-detached houses each of which incorporates a part of what was the old living accommodation above the pub (whether or not the previous accommodation was self-contained) then the onward sale or long lease will not be zero rated and VAT incurred on expenses are directly attributable to an exempt supply; furthermore if this is the developer’s only supply there is no entitlement to register for VAT. However, if the conversion is carried out horizontally; creating a self-contained dwelling from the previous living accommodation and a new dwelling from the bar area; sale of the flat that doesn’t incorporate any of the previous residential area will qualify for zero rate. Sale of the flat that incorporates the previous living accommodation will not qualify for zero rate unless it hadn’t been lived in for more than ten years in which case the clock starts again with regard to the first grant of a major interest. If this is not the case the sale is exempt.

Now, let’s turn our attention to recovering VAT on costs. Once registered, the developer can recover VAT on costs directly attributable to taxable supplies made. In the scenario above (assuming the ten year rule doesn’t apply) the developer should seek to have contractors separate their bills to them in respect of work to each flat so that direct attribution can be made to both taxable and exempt supplies, for the benefit of recovery under the partial exemption rules. The capital goods scheme is not a consideration for either the purchase of the pub or the refurbishment project as each is less than £250,000.

The rate of VAT on construction services provided to the developer will qualify at the reduced rate of 5% for both flats. The fact that the previous living accommodation was not self-contained works in the developers favour here; under the rules for qualifying conversions a greater or lower number of single household dwellings should be created; if it were self-contained work to the flat could only qualify for reduced rate if it had been unoccupied for at least two years prior to the work commencing under the provision for reduced rating the renovation or alteration of empty residential premises.

As you can see the VAT aspects are quite involved, seeking VAT advice in advance can reduce VAT on expenses significantly.

Q – We have just bought a twin cab pick-up for the business. Will the VAT man allow the VAT incurred on the purchase to be reclaimed on the VAT return?

A – Twin cab pick-ups have many of the features of cars e.g. rear passenger seats and rear passenger windows but also commonly have a “pick-up” area to carry loads.

However HMRC accept that any vehicle constructed to carry a “payload” of a tonne (1000kgs) or more is in fact not a car but a commercial vehicle. This is important because VAT incurred on the purchase of a car cannot be reclaimed if it is “available” for private use.

“Payload” is defined as the difference between a vehicle’s kerb weight and its maximum gross laden weight and so check the documentation carefully, as there are a few twin cabs which do not have a payload greater than a tonne.

What is not commonly known however is that it is possible to “lower” a twin cab’s payload by adding certain accessories, thus converting the vehicle into a car? This is most likely to occur with twin cabs with a payload of 1000-1050kg. HMRC however will ignore any accessory added other than a hard top. They will treat the addition of any hard top as having a generic weight of 45kg. So if the payload of the twin cab was 1010kg, the addition of a 45kg hard top would reduce the payload to 965kg. As such the twin cab would be a car with all the attendant rules restricting recovery of VAT on the purchase.

There is potentially another twist in the tail in respect of trying to recover all of the VAT on the purchase. As these vehicles so closely resemble cars and are quite often used as such, HMRC will not simply accept 100% business use and will often to try and restrict recovery by the extent of private use. There is no set figure for this and every claim will be accepted or not by the fact given to them.

As usual where there is potentially a lot of VAT at risk it pays to take advice.

For any further information on any of the issues outlined in this piece, please call the Advice Service on 01455 852555.

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