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Furlough fandango
I recently saw an interesting video by Martin Lewis (tinyurl.com/ws2je7o) on one-man or one-woman limited companies. Having explained that dividends could not be taken into account under the coronavirus job retention scheme, he confirmed that a director could furlough themselves and receive 80% of their salary under PAYE up to the standard maximum £2,500 for three (now four) months; so far, so good.
Mr Lewis then confirmed that a furloughed director could perform their normal statutory duties as a director without breaching the non-working rule, but must not earn money. The interesting point was that, as he explained it, the rule on not earning applied only to the director’s role in relation to the company. Thus, there was nothing to prevent them carrying out similar work in a self-employed capacity. So my client Joe Bloggs, who carries out motor repairs as Bloggs Garage Ltd, could furlough himself but then do the same work on a self-employed basis.
Presumably Bloggs should notify HMRC of this new self-employment with the usual tax and National Insurance effects. But what are the implications if he is trading from the company’s premises and uses its equipment? Also, could HMRC say he is diverting income from the company?
My other concern is whether this is ethical. HMRC’s guidance for employees says: ‘Whilst furloughed your employer cannot ask you to do work for another linked or associated company.’ Would not the self-employment fall within that description or is HMRC using the term ‘company’ to mean a corporate body?
Should I recommend this approach to Bloggs and other clients or would I infringe the Professional Conduct in Relation to Taxation guidance?
Query 19,547 – Freddy.
Juicy question
Our client runs a blog about fruit juices and health drinks which has been very successful. His turnover now exceeds the VAT threshold and we registered the business for VAT from 1 February 2020.
Generally, his commission is received two to three months in arrears so, working on the cash basis, we would expect his output for the first quarter to be relatively low. I am concerned that a lot of the income is outside the scope of UK VAT and I wonder whether we should therefore be restricting the input tax?
Most of the commission is from an advertising company in the US, but he also receives commission from Google and Amazon as well as suppliers, some of which are based in the UK. He also sells an e-book through Etsy Ireland. Finally, he receives fees for specific work that is invoiced to customers in the UK.
On the input tax side, this mainly relates to computers and equipment as well as some expenses on advertising. Our problem is that we are confused as to how to decide what elements or proportions of input tax are claimable and what are not.
Also, do we need to complete an EU sales list and what is the mechanism for doing this? Does the client need to issue invoices to all EU suppliers stating that they are responsible for the VAT under the reverse charge?
Can Taxation readers advise here?
Query 19,548 – Blitzed.
Corporate freeholder
I recently took on a new client who is a member of a right to enfranchisement (RTE) residential property management company consisting of ten leasehold flats. The company is limited by guarantee and only the leaseholders can be members of it. The company acquired the freehold reversion of the property in January 2001. Under the memorandum of association, the company’s objects include: ‘To exercise the right to collective enfranchisement with respect to the premises.’ The set-up of this company indicates to me that it holds the freehold as nominee for the leaseholders.
The company recently sold part of the garden which was available for use by all the flat owners. The company accountant says this is a capital gain of the company and it should pay corporation tax and then distribute the net proceeds to the members as dividends.
However, I believe these suggestions are incorrect. First, the beneficial owners of the freehold are the leaseholders so the capital gain should be theirs. Second, the company cannot distribute dividends because the articles of association state clearly that regulation 102 of Table A (Companies (Tables A To F) Regulations SI 1985/805) in relation to dividends does not apply to the company.
The leaseholders are happy with my opinion, but are wary of any future corporation tax enquiry.
Do Taxation readers agree that the sale of the land by the RTE company is a capital gain on the individual leaseholders rather than the company?
Query 19,549 – Mortimer.
Lettings compensation
We act for a client who owns a holiday letting cottage. Due to the coronavirus outbreak, he has had no bookings since the end of February and it seems that he will have none until the end of June at the earliest. This means that he has qualified for a £10,000 payment from his local council.
Can Taxation readers advise on whether this payment – or grant – is taxable income or non-taxable as compensation? If it is taxable, in what tax year should this be declared? There will be lost income due to cancelled bookings and a reluctance to book holidays in both 2019-20 and 2020-21.
Finally, are there any potential VAT implications here?
Query 19,550 – Basil.
