New queries: 12 September 2019

For keeps 

Exclusivity fee for securing property purchase.

My client is in the process of buying her first main residence for £850,000. In order to secure the acquisition while arranging the financing, she proposes to sign an ‘exclusivity agreement’ with the vendor  in exchange for a fee. The vendor would then be prevented from selling the property to anyone else before the agreed date and the buyer may unconditionally exchange contracts, followed by completion within 28 days.

The ‘exclusivity fee’ will be £2,000 or so, but I would particularly appreciate readers’ thoughts of a scenario in which the fee is £41,000 and thus a stamp duty land tax return would be required. 

Shortly after the client pays the fee (say, two months later) she will exchange contracts with the vendor, paying a 10% deposit and upon completion pay the balance of 90%.

Given that no property changes hands in consideration for the exclusivity fee, I wonder whether this can be argued as not being a ‘residential’ transaction.

Further, this treatment may then impact the subsequent purchase under the ‘linked transactions’ provisions, resulting in the entire purchase being ‘mixed’ upon which non-residential duty rates are payable.

What do readers think?

Query 19,431– S Dealer.

Gift horse 

Inheritance implications of gift with reservation.

Three years ago, my parents moved out of the family home and into a retirement village. It was decided that my wife and I would buy them the retirement property and my parents would gift my wife and I the family home. 

The value of both properties being about £450,000, we put both properties into the names of my wife and myself. This was not to avoid tax, but to simplify administration because my parents were elderly. We then let the family house. 

This was all done on advice from a solicitor with full knowledge of the coming residence nil rate band.

My mother died this year, but there now seems to be some question about the property having been gifted. 

Could readers help clarify that we will not be subject to inheritance tax because all my mother’s assets are simply inherited free of tax by my father. The value of her estate is about £300,000, including her half of the house. Our solicitor is suggesting that despite the estate being within the residence nil rate band threshold, there may be tax to pay on the ‘gift with reservation’ house that we are including in the estate.

Could Taxation readers confirm whether this is possible?

Query 19,432– Miss Lead.

Disclosure 

PSC tax underpayments on self-assessment return.

My client operates in the public sector through his personal service company and has been caught by rules for off-payroll workers in the public sector.

Although he has had two separate employments in the public sector with the relevant employers operating PAYE on his income, the PAYE deducted from them is insufficient. 

In the first employment he earned about £36,000 and PAYE was deducted of almost £7,300, as well as National Insurance. He earned £45,000 from the second employment, less PAYE deductions of £10,000.

The appropriate deductions have been made by me within the personal service company accounts so that there is, in fact, a loss here. However, when entering these salary and PAYE deducted figures on his personal self-assessment return, it is evident that a significant underpayment arises. Presumably this is the fault of the public sector payroll operators who have not deducted enough tax and National Insurance under the new rules.

I have sought guidance with regard to the entries required on a tax return where there is a significant underpayment. Is this to be reported through his self-assessment return or disregarded? I cannot find any guidance in this regard on HMRC’s website.

What would Taxation readers do in such circumstances?

Query 19,433– Tax Slave.

Trying to help 

Double invoicing VAT problem.

I act on behalf of a client who provides advertising services to the small business sector and her priority is to keep her clients happy.

She secured a 12-month contract worth £60,000 plus VAT for a building company and the director initially asked her to raise an advance tax invoice for the full value of the contract. She issued the invoice, but he then decided that he wanted monthly invoices instead. These would be for £5,000 plus VAT because he paid her monthly. 

My client obliged, but the invoice duplication has now come to light and HMRC has assessed my client for £12,000 of additional output tax and issued a deliberate not concealed error penalty for 35% of the tax underpaid.

This seems harsh because my client has not gained from the arrangement, but simply duplicated her paperwork. She accounted for output tax on the monthly invoices, but rightly excluded the annual invoice from her returns. 

To correct the problem, she can presumably issue a belated credit note to cancel the first invoice but will HMRC then reverse the penalty as well? Or should she claim bad debt relief because the advance invoice has never been paid and is more than six months overdue for payment? 

Readers’ thoughts are appreciated.