New queries: 9 May 2019

New queries

Flying sorcery

Tax treatment of cost of flying lessons for employee.

For many years, my client has employed his wife in his business. At present, he pays her the minimum wage but tells me that if someone else was doing the same amount of work he would have to pay them more. I suppose this begs the question of why he isn’t paying his wife more but I didn’t venture that far in the recent interview. Perhaps he is seeking to avoid class 1 National Insurance.

The client has recently told me that his wife would like to take flying lessons and believes that the cost will be about £10,000. His suggestion was that the flying instructor should invoice his business and he would pay this for his wife to have the lessons. This would presumably be treated as a benefit in kind on the wife – perhaps I should add that the business is operated as a sole trader rather than a limited company. That said, would it make any difference if it was a company or would there only be the possibility that the client might then be able to be charged on the cost because it would benefit a member of the director’s family?

My question is whether readers can confirm the income tax and National Insurance treatment here. Perhaps they could also confirm that the business will receive relief for the lessons as part of the employment costs.

I look forward to replies.

Query 19,363 – Amy.

Interesting bonds

Additional stock is received as interest on loan stock.

A client has been offered the opportunity to subscribe for loan stock in a company. The terms of the bond include the payment of 5% interest in the form of additional loan stock, redeemable at par at the end of the loan period. For example, a holder of £10,000 nominal stock would receive another £500 nominal at the end of the first year, and another £525 nominal at the end of the second year (5% of £10,500). The stock will not be a readily realisable asset and will be redeemed by the company after five years (all being well). The stock would also be repayable in the event of the company being taken over.

Can Taxation readers advise on how this interest is taxed in the hands of the recipient? In cash terms, it looks like a deeply discounted security (interest taxed on redemption or disposal), but the interest is not purely ‘rolled up’. There is also the option for the bondholder to make a one-off election to receive interest in cash instead; would the existence of that election change anything if it is not exercised? And how would income tax be deducted from the interest payments?

I would be grateful for any assistance from Taxation readers.

Query 19,364 – Blofeld.

Transfer payment

VAT of onward transfer payment for footballer.

I act as treasurer for a semi-professional football club. Three seasons ago, the club sold a player to a professional club for £50,000 plus VAT. The deal said that if the player was resold by his new club for a profit, we would receive 20% of the profit made on the deal.

In the event, the player was sold recently for £500,000 so we are entitled to receive a payment of £90,000; in other words, 20% of the £450,000 profit made by the selling club.

I always assumed that such payments were subject to VAT but after reading Neil Warren’s recent article ‘Donation dilemma’ (Taxation, 7 March 2019, page 10) and his reference to the CJEU case of EC v Austria (Case C-51/18), I wonder whether I am right.

In that European case, an artist was entitled to a royalty payment linked to the onward sale of the painting by the buyer who bought it from him. That royalty was deemed to be outside the scope of VAT because there was no supply of goods or services from the author – he was just receiving a payment to ensure he had a share in the ‘economic success’ of his work.

So my question is simple: should we charge VAT on our £90,000 payment from the club linked to the onward transfer of our former player?

I await replies with interest.

Query 19,365 – Charlton.

Posters and prints

Capital gains tax on the sale of posters.

My client has advised me that in his hippy days – the 1960s – he bought and acquired some posters advertising rock concerts, festivals, performers, bands and shops. At the time, they cost very little or were effectively worthless after the event and some cost nothing. He has recently been told that, on the right day at auction, these could be worth a reasonable sum of money. This gives rise to the possible tax implications.

The client has owned the prints for 50 or more years and has not actively bought and sold over the intervening period, so I presume there is no question of income tax, but what about capital gains tax? My first thought was whether the prints would be wasting assets? I suppose, ‘back in the day’, there was little idea that they would be of any use or value in 50 years’ time.

Also, if all the posters and prints are sold together, must they be treated as one asset – a collection – or could we allocate the sale proceeds to the individual items – perhaps based on an auctioneer’s estimate of their values?

I hope that Taxation readers can advise here.

Query 19,366 – Merry Prankster.

Replies

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