VAT Opting to Tax on Buildings

Buildings are generally exempt from VAT, but there are a lot of exceptions to this.

A person who holds an interest in a building (freehold or leasehold) can opt to tax the building, such that income from selling or letting the building is subject to VAT.

If you purchase a building and the purchase price includes VAT, you do not have to opt to tax that building.
Consider Ali who owns a VAT registered car repair business. He purchases a new commercial unit for £200,000 plus VAT of £40,000. The unit is used entirely for the car repair business, so Ali can reclaim the VAT of £40,000 in the same way he reclaims VAT on other purchases.

Ali does not have to opt to tax the unit to reclaim that VAT. In a few years Ali may want to sub-let the unit, in which case the rent will be exempt from VAT. This will make Ali's business partially exempt, which may mean he cannot reclaim all the VAT charged on his purchases. In that situation Ali may choose to opt to tax the building so the rent must have VAT added.

Please check with us whether you should opt to tax a building you own or lease.

Company Money in Personal Account

Here's a nice problem to have: your company holds a lot of money, but you want to leave it there for now. Perhaps you don't want to be taxed personally if you take the money out of the company. The company may also have long-term plans for the funds, such as acquiring another business or property when a suitable target is identified.

In the meantime the company may only be able to earn 1% interest on the money, but you could earn say 4% on the same amount in your personal deposit account. Could you hold the funds on behalf of the company (as a nominee), and place them in your deposit account to achieve the higher interest rate? It is possible, but there are several issues to deal with:

• The bank needs to be clear that the beneficial owner of the funds is the company and be willing to open an account on this basis. So the account name needs to be something like: 'A Brown as nominee for AB Ltd'
• There needs to be trust deed or similar document signed on behalf of the company that appoints you as nominee for the company's money to be deposited in your account.
• The board of directors of the company must be seen to have made an informed decision about this arrangement, and issue clear instructions as to the terms for depositing the funds. This should be recorded in the board minutes.
• The bank may deduct income tax from the interest paid on the deposit account, which would not be due if the account was held in the company's name.
• The Taxman needs to be convinced the funds in your account are not a loan from the company to you as a director or shareholder of the company.

This last condition is the most troublesome. If you don't meet it and it is deemed the company has made a loan to you which remains outstanding nine months after the company's year end, the company must pay tax of 25% of the value of that loan. You will also be taxed on the deemed interest payable on the loan at 4%, where the loan exceeds £5000 at any point in the tax year.

There are other practical considerations, so please discuss any such transfer of funds from the company with us first or if you have already done this without meeting the conditions above!

Tax Campaigns Update

The Taxman is determined to target tax evaders, so has been running several campaigns to target particular business sectors, such as doctors, electricians and e-traders.
The latest campaign is aimed at individuals who should be paying tax at 40% or 50%, but who have not submitted a tax return when requested to do so. These people will be offered a reduced penalty if the missing tax return is submitted by 3rd October 2012, and all the outstanding tax is also paid by that date.

If you know someone who has put their head in the sand regarding their tax affairs, please ask them to get in touch with us as soon as possible, so we can help them complete their missing tax returns.

Later this year the Tax Office will be targeting door-to-door sellers who sell to customers in their own homes. These sellers are often paid on a commission basis for the goods they sell, and may be vague about their own tax status.

Another campaign will target all tradesmen who provide home maintenance, repair or home improvement services. This will cover all small builders and skilled craftsmen who are not subcontracted to larger building firms.