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Nature of profit
Is profit made from loan repayment a capital gain?
My client made a loan of £100,000 to an individual in 2013 and a further loan of £75,000 in 2014. The loan was stated to be interest-free but repayable at a premium based only on the increase in collateral premium insurance.
This duly took place last month: the client has made a profit of £64,000. My question is simple – although the answer may not be – is this a capital gain for the 2022-23 tax return, or an income profit? It is in effect a ‘deep discount’ loan, but the rules for those relate to loans to companies, I believe.
Can anyone point me to a case or legislation that gives an unequivocal answer on the treatment of this loan?
Query 20,027 – Shark.
Effective winding up
Repayment of director’s loan from wound up company.
I was planning to advise my client to apply for an informal winding up of his personal company, which has nominal share capital and no assets other than accumulated cash of about £20,000.
All of the conditions for an informal winding up under Companies Act 2006, s 1030A would have been met. However, he has told me that he has already transferred all of the cash in the company to his personal account – there is no paperwork to go with this.
My thinking is that this prior transfer of cash should be treated as a directors’ loan. The company can then make an application for strike off under CA 2006, s 1003. One of the conditions for capital treatment in CTA 2010, s 1030A is that the company intends to secure the payment of any sums due to it. Is it essential that the individual puts the money back into the company before the striking off is applied for or can the process be shortcut simply by a distribution in specie of the loan account?
I am nervous about advising that the money should be put back into the company – the bank might block the account if it becomes aware of a potential strike off. There would be a s 455 liability in respect of the loan. If the loan is repaid then this shouldn’t be an issue, but I am aware that s 455 requires the loan to be repaid ‘in an accounting period’ – my client’s company has ceased trading and has no other assets so does it actually have an accounting period? Is this a problem?
Query 20,028 – Worrier.
Disclosure
Duty to remind HMRC of open enquiry.
One of my clients implemented an avoidance scheme over 20 years ago. HMRC raised an enquiry into the relevant return within normal time limits and my client provided large amounts of documentation. There was some correspondence over the first few years but nothing has happened now for at least five years. The scheme is not one which has been litigated and HMRC has made no attempts to close my client’s enquiry or to move it on to litigation. I am as certain as I can be that such an old case has just got lost in the system and that nobody in HMRC is aware that there is still an open enquiry.
If HMRC did issue a closure notice denying my client the advantage of the scheme there would be no point in appealing: there is no way that a tribunal would now find in his favour. The tax involved would be in the region of £20,000 and there would be a huge interest bill. Obviously I could write to HMRC (if my client agreed) pointing out that this matter is unresolved, but do I have any obligation – professional or legal – to do this? The last letter from HMRC is along the lines of ‘thanks for the information – we will consider it and get back to you’ so there is no unanswered correspondence from my perspective.
I know if I do nothing this will never resurface. Can I let matters rest in peace?
Query 20,029 – Fabian.
Hairdresser’s salon
Will business split of salon cause a VAT problem?
A client rents the freehold of a building and trades as a hairdressing salon. She provides services along with four self-employed stylists. She is VAT registered but the stylists are not. The landlord does not charge her VAT on the building rent. She charges a turnover rent to each stylist, which is subject to VAT as a rent-a-chair arrangement. My client has suggested an alternative business model to save VAT:
- the landlord will directly invoice each stylist for use of the premises (about £50,000 a year, the same as the current rent charged to my client);
- my client will charge a consultancy fee to each stylist for giving them the benefit of her experience in the trade. This income will be taxable – about £30,000 a year – along with her own hairdressing work, which is for a similar amount.
Overall, my client’s total taxable income will reduce from £110,000 to £60,000 each year, meaning she can deregister. This is because £50,000 of fees will be charged directly from the landlord to the stylists. The landlord’s annual taxable income of £50,000 is also below the £85,000 registration threshold – he has no other income. What do readers think of the proposed arrangement? Will HMRC challenge it in the future?
Query 20,030 – Sasson.
