New queries, issue 4511

Fitting-out fees

Are capital allowances claimable on the preliminary costs of an office fit-out?

A company is carrying out a major fit-out of new office premises that it plans to occupy in the next year and has obtained a final quote from its builders for this work. As at the year end, the company had incurred significant preliminary and professional fees (such as project management fees, architects’ and surveyors’ fees) on the project. However, the fit-out itself will not be completed until next year.

In the tax case JD Wetherspoon plc v HMRC (and cross-appeal) [2012] STC 1450, HMRC accepted that preliminary and professional fees may be apportioned between qualifying and non-qualifying expenditure on a reasonable basis for a capital allowances claim.

Accordingly, we have analysed the capital expenditure quote between qualifying and non-qualifying expenditure and have used the ratios derived therefrom to attribute qualifying expenditure incurred on the professional fees.

Our question is whether capital allowances can be claimed on the professional fees in the current year before the fit-out is completed?

Because the company is carrying out a qualifying trade and the professional fees have been incurred and paid by the year end, the first two conditions for claiming capital allowances have been satisfied. The issue is whether the third condition – which requires that the asset must belong to the person who incurred the expenditure – has also been satisfied. Alternatively, will capital allowances be denied on the ground that "the underlying asset [the asset created by the project] does not yet belong" to the company because the assets have not yet been created?

Will it make a difference if the project has not started by the date the capital allowances claim is submitted?

Readers’ views and responses are very much welcomed.

Query 18,632 – Project Manager.

Student support

Do tax liabilities attach to the funding of a student’s post-graduate studies?

I am a mature student who is self-employed, but I receive state benefits based on my low income. I am about to embark on a post-graduate course but, currently, student finance cannot be used for such educational programmes. However, a generous friend has offered to help me with the course fees (£7,000) together with a further £4,000 to help towards my living expenses. I know; I am very lucky.

My question for Taxation readers is whether I will have to declare any or all of this as income for my self-employment. In my mind, it is in effect a gift and the £7,000 will be paid out straightaway towards the course fees. As an aside or comparison, I did wonder what the tax situation might be had I applied for this educational funding by way of one of the crowdfunding websites. Would the tax position be any different if I had raised money by such "donations"?

I await replies.

Query 18,633 – Student.

Deliberate error?

VAT returns were wrong because of total reliance on a spreadsheet. Is a penalty due?

My client recently had a VAT inspection and the officer discovered an error for three successive VAT returns. Only one month’s input and output tax figures had been included on each return instead of three months. The resulting net underpayment of tax was £80,000.

The officer has decided that the error should be subject to a "deliberate error not concealed" penalty and has charged a 35% penalty of £28,000. If this penalty is enforced, it will close down my client’s business, which trades in supplying and fitting mezzanine flooring.

The reason the officer thinks the error was "deliberate" is because no "business person of reasonable intelligence" would fail to recognise such big underpayments in his VAT liability.

My client says he never checks the figures and just relies on the spreadsheet formulas being correct. What do Taxation readers think – can he "get out of jail free" on this one?

Query 18,634 – Penalty Taker.

Online trading?

Advice required on when a hobby transforms into online trading.

I believe that HMRC are again warning those who are carrying out a trade online, perhaps through trading websites, that they should be declaring their profits and paying income tax and National Insurance contributions as applicable.

I understand that HMRC are looking for unregistered traders rather than those who are simply selling unused personal property. My concern is how they will separate the former from the latter.

As an example, a client of mine has collected vinyl records for many years for his personal enjoyment. In the process of buying records for his own collection, he finds good quality discs that are not of particular interest to him. In the past, he tended to ignore these, but recently he has concluded that he could buy and resell them. In his own collection, he may also have several copies of records that he does like, which he has bought because they were better copies. As the collection has grown and space is at a premium he is now thinking that he should sell the older, lower quality copies. He has asked for advice on the tax implications.

I think that I am familiar with the various "badges of trade", but I am starting to wonder how one differentiates trading and non-trading transactions and whether there is any guidance that can help to identify the point at which a hobby moves into a trade.

There must be other examples, such as when selling unused clothing expands into a wider buying and selling activity.

Can Taxation readers advise on the best approach that should be taken here to avoid accusations of income being omitted from the tax return?

Query 18,635 – The Wolfman.

Issue: 4511 / Categories: Forum & Feedback