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Two companies
Status of loan to a connected company
My client has two completely different businesses, each operated through its own company. One is successful and has cash reserves, and the other needs a cash injection.
It occurs to me that if one company funds the other directly, it would avoid income tax charges on drawing money out and putting it in. But I am worried that a loan to a connected company might fall foul of ‘loans to participators’; would an equity investment suffer any adverse tax consequences? The client knows he may lose his money.
To complicate matters, the cash-poor company was set up many years ago under the enterprise investment scheme; the original four shareholders are now two, and each has a holding that is partly exempt from capital gains tax on gains.
Do Taxation readers have any comments or see any issues?
Query 19,599 – Lincoln.
Out of time?
Is a client obliged to correct a VAT error that is out of time?
I have a dilemma with a VAT problem for a client. On 31 August 2019, I submitted a form VAT652 to HMRC to correct some VAT accounting errors going back to the period ending April 2016.
I heard nothing back from HMRC so called them in November 2019 to check that the form had been received, which it had. The HMRC officer said that there had been a backlog of forms to deal with, but it would be processed within two weeks.
Unfortunately, that did not happen and I chased again in January 2020 only to be told that it was a complicated assessment because it included more than one VAT period.
Finally, we received a letter from HMRC on 30 June 2020. This confirmed that the assessment had now been processed, with the exception of the underpayment in the April 2016 period which was now out of time. However, the letter said the client could ‘make a voluntary payment’ on his next return in box 1 and box 3 if he wanted.
Is this outcome correct? Is the client obliged to make the payment and what are the consequences, if any, if he does not do this?
The amount in question is £1,750, so a significant amount of money.
Query 19,600 – Pandora.
Property purchase plan
Capital gains tax and SDLT in a house purchase and resale.
My client lives in a substantial house – ‘Toad Hall’ – which is the last property before a bend in the road. Being on the bend, the neighbouring house – ‘Dulce Domum’ – sits on a plot that is very much larger. Without drawing a diagram, and although the frontages are the same, the neighbouring plot is shaped more like a slice of a circular pizza rather than my client’s rectangular plot. Dulce Domum has recently come onto the market.
My client likes his house and does not want to move, but he would like a larger garden. He plans to buy the property next door and move the fence dividing the properties across into the neighbouring plot to increase the size of his own garden by about half again.
Once the property deeds have been amended, my client then plans to resell Dulce Domum. Even with a smaller garden, he thinks that Dulce Domum will still be worth a similar amount as before. The properties are worth about between £1.5m and £2m.
Can readers advise on capital gains tax and stamp duty land tax liabilities. I am very interested in the SDLT aspects.
Query 19,601 – Graham.
R&D problem
Restructuring possibilities for employee’s R&D costs.
For some years, my client operated through a personal service company and worked on a research and development (R&D) project. So far, this has been funded by his contractor income and he has claimed the 130% tax relief (as well as the normal tax deduction).
Unfortunately, the extension of the off-payroll rules has meant that the company he has been working for has put him on a personal employment contract. He is now funding the research through his taxed income and is building up a large credit balance on his director’s loan account.
I believe he will be able to claim the 14.5% R&D tax credit in the company, but this still leaves him with a large unrecoverable tax cost and the relief is much less than the 130% deduction would allow. Ultimately, in five to ten years, he is hoping that the royalty income will mop up all the tax losses, but he has an immediate funding problem. This will be even worse next year without the Covid-19 grant.
I don’t see that it would be any better if the contract remained with his company because the IR35 rules would apply. Can anyone suggest a structure that may mitigate the funding crisis?
Estimated R&D costs are as follows.
I hope Taxation readers can advise on whether there is a more tax-efficient arrangement that might work here.
Query 19,602 – Apollo.
