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Tax treatment of compensation payment and fine.
One of my clients runs a small business as a tree surgeon or arboriculturist and has several employees who help him.
Recently, one of the employees left the electrical supply cable to the chipping machine lying on the ground in deep grass. The inevitable happened and another employee tripped over it fracturing his arm and suffering multiple bruises. The injured employee is now claiming compensation although he has continued to receive full pay during his period of recovery. My client is also concerned that a fine may be issued by the Health and Safety Executive (HSE).
Can Taxation readers advise on whether either or both of any compensation or fine would be deductible in calculating taxable profits?
I assume that the compensation would, in effect, be part of the employee’s remuneration although I am unsure whether income tax and Class 1 NI should be deducted from it under PAYE.
I also know that, generally, fines are not tax deductible but I have it in mind that they might be in some instances. For example, I think there have been suggestions that payments relating to a case for defamation brought against a newspaper could be allowed because this would be part of the normal risks of running such a business. While accidents are always very regrettable, there must be some businesses where such risks are high purely by the very nature of the work.
I look forward to readers thoughts.
Query 20,211 – Lumberjack.
How should company shares held in trust be valued?
I am trying to determine a client’s exposure to IHT.
The client is the life tenant of three interest in possession trusts, all settled at different times by different family members. They are all qualifying interest in possessions (either by virtue of being settled pre March 2006 or by being immediate post death interests). Therefore, the assets of all the trusts are deemed to form part of the client’s estate for IHT purposes.
Each trust owns shares (directly or indirectly) in an investment company. Trust 1 owns A ordinary shares in the company. Trust 2 owns B ordinary shares in the company. Trust 3 owns shares in a holding company whose only asset is A ordinary shares in the company.
How should these shares be valued in the client’s estate? Are any of the shareholdings aggregated together when valuing the trusts’ respective holdings or are these holdings valued on a standalone basis?
Query 20,212 – Ill equipped.
Student accommodation and change of use to holiday lets.
One of my clients purchased the freehold of a new building four years ago for £550,000, certifying to the developer that it would be used only for student accommodation and was therefore zero-rated as a building to be used for a ‘relevant residential purpose’.
However, the business model has now changed and my client will rent out the accommodation instead for temporary lettings to tourists and holiday makers. The apartments will be furnished. There will be no student lettings.
My client will not need to register for VAT – even though the income from temporary lets is VATable – because the projected annual income of £75,000 is less than the £85,000 registration threshold.
But is there a problem with the capital goods scheme – or other VAT legislation – with the change in use ie, does the £550,000 purchase price need to be treated as VATable for six years out of ten?
The guidance seems very confusing.
Query 20,213 – Tom Brown.
Where is company established for VAT: UK or Portugal?
One of my clients is a UK incorporated company with a single director and shareholder and it provides marketing services to UK and Portuguese businesses. The company has never registered for VAT because the UK annual fees are less than £85,000, the place of supply being Portugal for the overseas work.
The company has incurred a lot of VAT on buying recording equipment, which will be stored at the premises of the main UK customer, so registering for VAT voluntarily now seems wise in order to claim input tax.
However, the twist to the tale is that the sole director/shareholder who does all the work is resident in Portugal and only comes to the UK for about eight weeks a year, staying in an Airbnb apartment near to his main customer’s premises in Oxford. Does this create a UK VAT registration problem? If it is relevant, the registered address with Companies House is our office in Oxford. The company uses some UK subcontractors who are VAT registered and they have charged UK VAT and issued their sales invoices to our office rather than Portugal.
Query 20,214 – Lisbon Lucy.
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