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I act for a client who runs a small building company which carries out maintenance work and small building projects. The husband and wife directors own non-commercial rental property in a personal capacity. They intend to engage the company to carry out building work on land adjoining flats that they own, which will increase the number of flats available for letting on short leases. The work will be zero rated as construction of a dwelling.
I act for a client who runs a small building company which carries out maintenance work and small building projects. The husband and wife directors own non-commercial rental property in a personal capacity. They intend to engage the company to carry out building work on land adjoining flats that they own, which will increase the number of flats available for letting on short leases. The work will be zero rated as construction of a dwelling.
The question is whether the work can be invoiced by the company at cost without causing benefit in kind problems or affecting the zero rating. The Revenue's Statement of Practice 6/85 implies that this is acceptable.
Readers' comments would be appreciated.
(Query T15,822) – Canvey.
The clients must create a taxable supply by their company in order to benefit from the zero rating for the construction of the new flats, against which input tax on materials can be recovered. Moreover, if the company instructs the architect and other advisers, input tax on their standard-rated fees can also be reclaimed.
I suggest a simple contract under which the clients instruct the company to design and build the new flats. Although it is a trifle artificial for them as clients to instruct themselves as directors, I think it worth going through the motions in order to have a contract to put before Customs if the transaction is queried.
If VAT on fees is recovered as well as on materials, I also suggest creating a small profit in the company even if this is not strictly required for corporation tax purposes. This is to deter Customs from suggesting that the transaction was not commercial, that the materials were bought on behalf of the clients as individuals together with the services of subcontractors and that the supply of the professional services was not to the company.
Customs have power, in a situation in which a supply has been made at below market value to a connected person, who cannot recover VAT, to substitute market value retrospectively for up to three years. That would not help them here because the supply would still be zero rated. In any case, an officer would probably not worry about recovery of VAT on materials in the company when, had the work been done by an independent contractor, it would all have been zero rated anyway. However, the officer might be tempted to challenge recovery on the fees. If there is significant money involved, a contract and a small profit earned thereon should prevent the transaction being said to be not a part of the business of the company. – A St John Price.
'Canvey's' main problem is a claim by the Inland Revenue that the invoice must truly reflect the market value of the work done, not just the cost price.
Personal experience by the writer to such a claim in similar circumstances was to prove that the construction was not carried out on a truly commercial basis but rather a 'hospital job', i.e. that the company merely does the development in between other work and therefore provides for the recovery of wages, etc. which would have to be paid because of lack of work elsewhere. The question addressed to the Inspector was: 'Would you accept a full price from a builder who states he will turn up when it suits him, carrying out such work on the project as convenient, cannot give a completion date and will charge as and when he feels like it?'. The Inspector readily agreed to market value equalling direct cost without recourse to the Commissioners. The fact that the renovation took three years fully supported the contention.
'Canvey' may not have such an advantage and, therefore, the contract between the company and the directors would need to be carefully drawn up with, if possible, alternative quotes, so market value can be assessed. 'Canvey' would also be advised to disclose the contract if it represents a significant part of the company's turnover, when submitting the corporation tax return, in order to avoid a later discovery. – P.J.S.
Extract from reply by 'Bear':
Under Schedule D, market value under Sharkey v Wernher 36 TC 275 is inapplicable to services rendered to a trader personally. Strictly, the matter is regulated by section 156, Taxes Act 1988 which looks to the company's costs as the measure of Schedule E benefits. Only if a distinct asset has been brought into existence would it be necessary to substitute market value. Evidently, it depends on whether the company merely supplies materials and labour delivered to the site or whether the company is in occupation (under licence) and is constructing a complete building.
As it is proposed that the company will invoice the directors, the benefit under Schedule E is cancelled by the amount made good on settlement of the invoices. Care should be taken to ensure that the directors remain in personal occupation, perhaps by clarifying the status of any clerk of works.
