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Cart before the horse?
Annual investment allowance and furnished holiday lettings.
My client is about to construct a large property as a furnished holiday let (FHL). He has no other such properties.
There will be substantial expenditure eligible for capital allowances (CA) within the construction cost. He has other income and would like to make an annual investment allowance (AIA) claim. We know he can relieve losses arising from CA claims sideways by way of ITA 2007, s 120 if he elects to prepare GAAP accounts and is subject to the cap on sideways losses.
However, we think pre-commencement expenditure cannot form the basis for an AIA claim because expenditure deemed to have been incurred on the first day of trading is disapplied for AIA.
He is therefore thinking of starting an FHL business by acquiring a ready-made property that will definitely qualify. Because for CA purposes all FHL properties are deemed to be a single FHL business (CAA 2001, s 17) he will have started his FHL business and expenditure will be eligible as an AIA claim. He would then appear to be in an equivalent position as, for example, the owner of an existing manufacturing business who starts construction of a new factory and makes AIA claims on the cost of that new factory by reference to the period in which the expenditure is incurred, even though that new factory may not yet be operational.
I would be interested in readers’ views on the following points.
First, can an AIA claim be made before the property has been constructed and, if not, where the above analysis might be inapplicable.
Second, what happens if the newly constructed property does not meet the FHL letting requirements, either in the first year after completion or thereafter?
I look forward to replies.
Query 19,383– MBK.
Medical complications
VAT on stand hire at overseas exhibition.
My client is VAT registered in the UK and organised an exhibition in Qatar
on medical equipment and supplies. Delegates who attended were charged entry fees, but the main source of income was fees charged to medical suppliers for a stand to promote their goods.
We charged 20% VAT to UK suppliers for a stand but not overseas suppliers under the general B2B rule. However, an employee of my client has said his old firm in the same business never charged UK VAT for stands taken out by UK exhibitors at overseas events under the ‘use and enjoyment’ VAT rules. This is a new term for me – do readers have any thoughts on what these rules mean?
Should my client issue a VAT credit to UK exhibitors and reduce his output tax on the next VAT return? As an aside, Qatar does not currently have a VAT system.
Query 19,384– Dr Doolittle.
Goods for own use
Trading stock items that are taken for personal use.
My experience is mainly in corporate tax but recently I have taken on some sole trader clients and am having to deal with goods taken for own use.
I know that if items are taken from trading stock there is deemed to be an open market value disposal. So, if one of my shopkeeper clients takes a tin of beans from the shelves I must bring the market value into the tax computation. But when does something actually become trading stock? If my client buys 60 tins of beans from the wholesaler, takes one home and puts the other 59 in the shop do I take a trading deduction for the 60 tins and make a market value adjustment for the one tin? Alternatively, do I simply include the cost of only 59 tins as a trading expense?
What evidence is necessary? Should the client separate the business and private tins when putting them through the till so there are two items on the till receipt? Should he actually make two visits to the wholesaler – one for personal and one for business?
Obviously one tin of beans is neither here nor there, but it does illustrate the principle and in some cases the amounts involved can be substantial. How do advisers deal with this in practice? Do they advise clients to go through all of these hoops? Or is it sufficient just to put a round-sum addback into the tax computation? Any advice would be gratefully received.
Query 19,385– Shopkeeper.
Alphabet corner
Director dispute over dividend distribution.
I act for a company consisting of three directors and equal shareholders. The company is profitable and the directors receive dividends of £50,000. For the past three months, one of the directors appears to have had personal problems and sometimes not turned up for work.
Although the other two directors are sympathetic, it is affecting the business. It came to a head last week when he failed to return to work despite assurances that he would, and the business has now lost a customer.
The first director refuses to resign and the other two feel aggrieved that he will still receive dividends.
The share structure consists of three £1 ordinary shares. If the company was to issue a further three A, B and C shares and gave one to each current shareholder, would it be possible to vote dividends to each class accordingly. So, if the director had one A share and did not work, dividends would be voted only to the B and C shareholders.
How would HMRC view this and what issues should I be aware of here?
Query 19,386– Planner.
Replies
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