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Is there an alternative to using time apportionment?
My client purchased a house 20 years ago. He lived in the house as sole residence for 15 years and then moved out five years ago and rented the property out to a third party. Shortly after moving out he spend a considerable sum on capital improvements to the property.
He is now in the process of selling the property and we are looking at the potential CGT liability. If you look at the value of the property at the date he moved out plus the cost of capital improvements, there will be no real economic gain during the rental period. But if we look at the total gain over the period of ownership then – even taking account of the improvement costs – a considerable capital gain arises and, on a time apportionment basis, a quarter of this gain (roughly) will be exposed to tax.
My client thinks that this is unfair. I don’t think that there is any alternative to using time apportionment but I would be grateful for anybody who has any experience of this issue and who may have adopted an alternative approach.
Query 20,359 – Justice Seeker.
Tax liability on paying out distribution to members.
Are the members of an unincorporated club liable to tax when the club distributes unwanted funds to the members in accordance with the club constitution which caters for such a distribution pro rata to years of membership? The details are as follows:
- No member has paid an initial contribution.
- Members pay an annual subscription.
- There is a surplus from mutual trading, but much of the distribution will be from the sale of the club premises.
- The club will be liable for corporation tax on the gain.
The premises were used by the members except that there was a flat above with shared access rented to tenants. The club has paid corporation tax on the net rental income.
Would the answer be different if the distribution was on a winding up?
Query 20,360 – TheythinkIknow.
Should taxpayers submit form VAT652?
Readers’ forum replies to queries relating to VAT errors consistently advise that HMRC should be separately informed of VAT underpaid even when an error has been correctly rectified on the next VAT return after discovery of the error in order to be treated as an unprompted disclosure of a non-deliberate error. This is to prevent any financial penalty (which has also been my understanding of the appropriate procedure).
However, for a non-deliberate error that is of insufficient amount such that submission of form VAT652 (or a letter) is not required, HMRC’s online guidance (tinyurl.com/tellHMRCaboutVATerrors) states under ‘What you can do next’ that ‘correcting errors by making an adjustment or correction in your next VAT return is the simplest way and most commonly used’.
The guidance confirms that the correction must be made online or by using VAT652 if correcting a deliberate error or if the taxpayer does not want to make the correction on the next VAT return. There is no mention in the guidance of any risk that a financial penalty might be incurred if the error is not separately reported to HMRC.
My inference from the above guidance is that HMRC does not want such errors to be separately disclosed (it has limited resources) and accepts that no financial penalty should apply in the above circumstances, which seems reasonable given that the taxpayer has made an unprompted correction on the VAT return and on the assumption that all relevant supporting documentation is retained such that the need to make any additional disclosure to HMRC is superfluous.
Submission of form VAT652/letter would result in being charged default interest if that represents commercial restitution (no interest is charged as long as no such submission is required).
Do readers agree that it is safe not to submit form VAT652/letter in the circumstances described above?
Query 20,361 – Jennifer.
Does option to tax on land also apply to buildings?
I think that one of my farmer clients might have scored an own goal with VAT.
About five years ago, he opted to tax some farm land with HMRC because a developer was interested in buying it in order to build and sell new houses. The reason my client opted to tax the site was because a land professional handling the deal was going to charge him a fee of 15% of the sale value plus VAT and my client wanted to claim input tax on this fee.
The deal fell through and my client instead constructed two small warehouses on the land and claimed input tax on all of the costs – the aim has always been to rent out the warehouses and this has happened.
However, my client has not charged VAT on the rent since the two tenants moved in three years ago, and one of them is partially exempt for VAT purposes. My client says that the option to tax was only made on the land and could not apply to the warehouses because they weren’t built at the time he opted. This seems reasonable but does it mean that he should not have claimed input tax on the costs of building the warehouses because they relate to exempt rental income?
What do readers think?
Query 20,362 – Giles.
Queries and replies
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