New queries: 23 May 2019

Common control

The extent of the annual investment allowance.

My clients own two standalone companies, each with the same four shareholders owning 25% of the shares so that no one person controls the company.

Both companies regularly exceed the annual investment allowance because they are continuously reinvesting in fixed assets to grow the businesses.

Previously, I have always advised the client that the two companies must share one annual investment allowance since they are under common control and are related given the similar trades.

However, on revisiting CAA 2001, s 574 I am inclined to think that there is no common control since no one shareholder has control, nor are they obliged by any agreement that they act together to exercise control.

I should like to hear readers’ views on the application of s 574 and whether there is one shared annual investment allowance. Alternatively, does each company have its own annual investment allowance in the above circumstances.

Query 19,371– Capex Charlie.

Virtual reality

Attendance of directors at meetings to agree dividends.

We have a client who pays regular interim dividends on a monthly basis. This requires the holding of directors’ and shareholders’ meetings to agree and minute this activity.

The issue is that at any one time the various directors and shareholders cannot attend such meetings in person.

We believe directors’ meetings can be held by facetime or video, but how should the minutes indicate the location of the meeting? Is it sufficient for the purposes of the minutes that if only some of the directors and shareholders are present, the others can be stated as joining in by video, with the address where they participated?

We have been unable to find anything to confirm whether our thinking is correct and should be grateful for any assistance from Taxation readers on this matter.

Query 19,372– Pernickety.

Revamp

Deductibility of expenditure in renovating classic cars.

Our clients have recently started a second-hand car business, specialising in high-value classic vehicles. They have asked us for guidance on the second-hand margin scheme for VAT. We have reviewed the notes in the VAT Notice 718 and, in particular, paragraph 3 on the deductibility of expenditure in calculating the margin on which VAT is charged.

The notes appear to be specific and the examples in paragraph 3.2 restrict expenditure to the direct costs of acquiring the asset in the first instance and would appear to exclude refurbishment costs, preparation for sale, marketing, photographs, repairs and restoration. However, our clients, who have been in the industry for some years, are aware that other firms have been deducting these costs when calculating the gross margin and this approach has not been challenged in visits by VAT officers.

In some instances, the expenditure on the vehicles may be significant and include major alterations such as a change of engine or installing new equipment such as petrol injection equipment or modern running gear in place of carburettors or old-fashioned drum brakes.

Would there be an argument to say that this was the combination of products into one item of sale and therefore the expenditure on the individual items would be deductible in calculating the margin?

It seems unduly harsh that denial of the expenditure in bringing the car up to a saleable condition is not allowed and could turn a gross profit into a loss due to the VAT on the margin without recognising the expenditure incurred. Is there any way that other direct costs of preparation and marketing could be claimed against the gross margin before calculating the VAT due?

I look forward to hearing what readers might think of this situation.

Query 19,373– Fangio.

Demolish and build

Only or main residence relief with interrupted occupancy.

A client lived in a house as their main residence for two years before deciding to demolish it and build a new property on the same land. This took just under one year to complete and the client has now lived in the new house for a further two years.

Can he claim only or main residence relief for only the past two years, or for the whole five years?

I am aware of the following references, but would like assistance from readers on their application and interaction to my client’s situation:

• HMRC’s Capital Gains Manual at CG64388 and CG64390, regarding land being a separate entity.
• CG64377 and CG64381, regarding Varty v Lynes [1976] STC 508 and date of disposal.
• CG65003, regarding ESC D49.
• Desmond Higgins (TC05724).
• CG64760, regarding ‘just and reasonable’.
• CG64920 and CG64930, regarding the ownership period.

I look forward to hearing from Taxation readers.

Query 19,374– Home Owner.

Replies

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