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When is a tax deduction allowed on property acquisition?
Acquisition costs need to split into capital and revenue expenses.
“Several tests have been developed through case law to ascertain whether expenditure is revenue or capital in nature. The ‘enduring benefit’ test, which originated from Atherton v British Insulated & Helsby Cables Ltd [1925] 10 TC 155, is one such test.
“In this case, that expenditure incurred with a view to providing the business with an ‘enduring benefit’ was not allowable as a trading expense. ‘Enduring benefit’ means that the expense will benefit the business not just in the year in which it is incurred, but also in the years that follow. [Taxation]
Capital Expenses
- Legal costs for the property purchase
- Property Acquisition Cost
Capital expenses are only recovered as part of the capital gains calculation when they are added to the purchase cost to reduce the overall gain.
Revenue Expenses
- Mortgage arrangement fees
- Legal fees on arranging loans
- Lenders normally include valuation fees in their charges
Revenue expenses are charged to the P&L and are deductible against income tax/corporation tax.
When loan costs are material they would normally be amortised over the period of the loan in order to apply the matching principle of accounting.
You cannot deduct:
- Expenses incurred in connection with the first letting or subletting of a property for more than a year. These include legal expenses such as the cost of drawing up a lease, agents’ and surveyors’ fees and commission.
- Any costs of agreeing and paying a premium on renewal of a lease.
- Fees for planning permission or registration of title on property purchase.
steve@bicknells.net
How do you account for Construction Retentions?
It’s a very common question, the client pays you and keeps a retention of 5% reducing to 2.5% on completion to be released after the end of the defects period.
You do the same with your sub-contractors.
The retentions need to be held in balance sheet accounts as they can’t be invoiced to client and aren’t due to the sub-contractors. But they should be included within sales and sub-contract costs.
HMRC’s guidance is in BIM51520
In the construction industry it is a common feature of construction contracts for the customer to retain part of the contract fee over a maintenance period pending the satisfactory completion of any remedial work required by the contractor. Typically this may be for a 12-month period between a Certificate of Completion being given and the issue of a Maintenance Certificate.
In their accounts, builders will generally deal with retentions in one of the following ways:
- include retentions within turnover, provide for the estimated cost of remedial work, and make provision for any debt impairment (see BIM42700 onwards), or
- defer recognition of retentions until their receipt becomes virtually certain.
Each of the above accords with generally accepted accounting practice and should be followed for tax purposes unless an unrealistically conservative view has been taken.
In recent years, construction industry customers have become increasingly reluctant to pay retention monies, irrespective of whether there are defects to be made good. It is now common for such monies never to get paid. Consequently, it will often be the case that, whichever of the above approaches is adopted, there will be little or no difference in the figure of net profit.
A challenge will only be appropriate in worthwhile cases. For example, where retentions are only recognised on receipt but, in practice, a large proportion is in fact consistently paid over to the builder and there is a significant tax effect (compared with the alternative provisions method).
There is guidance on VAT in VATTOS5170
……the tax point for retentions is delayed until either a VAT invoice is issued or payment of the retention is received, whichever is the earlier. It must be stressed that this only applies to the retained element of the contract price. The rest of the supply is subject to the normal tax point rules.
steve@bicknells.net
We love Self Employment in UK…..
The UK has seen the fastest growth in self-employment in Western Europe over the past year, according to the Institute for Public Policy Research (IPPR).
The number of self-employed workers rose by 8%, faster than any other Western European economy, and outpaced by only a handful of countries in Southern and Eastern Europe.
The IPPR’s analysis shows that the UK – which had low levels of self-employment for many years – has caught up with the EU average. If current growth continues, it says, the UK will look more like Southern and Eastern European countries which tend to have much larger shares of self-employed workers.
According to Tax Research UK…
Something like 80% of all the new jobs created since 2010 are, in fact, self-employments, and there are a number of things that very significantly differentiate self-employments from jobs.
The first is security: there is none.
The second is durability: vast numbers of new small businesses fail, which is one reason why I doubt the official statistics. I am sure they record the supposed start-ups correctly but seriously doubt if they have properly counted the failures.
Then there is the issue of pay. The evidence is overwhelming that in recent years earnings from self-employment have, on average, declined significantly.
A worker’s employment status, that is whether they are employed or self-employed, is not a matter of choice. Whether someone is employed or self-employed depends upon the terms and conditions of the relevant engagement.
Many workers want to be self-employed because they will pay less tax, this calculator gives you a quick comparison between being employed, self employed or taking dividends in a limited company.
HMRC have a an employment status tool to help you determine whether a worker can be self-employed or should be an employee http://www.hmrc.gov.uk/calcs/esi.htm
In summary, why is it attractive to use Self Employed Freelancers?
- Skill is more important than location in many business sectors – we live in world where internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
- Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
- Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
- Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
- 110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.
So do you think self employment is good for the UK?
Why would you liquidate a solvent company?
If you have a company which is no longer needed you have the following options:
- You can just keep it as a Dormant company
- You could strike it off at Companies House
- You could carryout a Members Voluntary Liquidation
If the company has assets the shareholders will want to release the assets and get hold of the money, so keeping it Dormant isn’t going to help.
Since March 2012, in the case of Strike Offs, ESC C16 has allowed the distribution of up to £25,000 as a Capital Distribution rather than as Income.
However, if you have assets in excess of £25,000 distributions can only be treated a Capital if the distributions are made through a formal liquidation.
With Entrepreneur’s relief, money paid to shareholders will only be subject to tax at 10% on the capital gain.
There could also be other benefits too.
steve@bicknells.net
Big is not always beautiful!
It may seem strange advice to beware of winning big contracts. After all most small businesses dream of catching that biggee which will set them up for the future. However, many a great small business has failed because they won a big contract with a large corporation.
The biggest problem is cash flow.
Large companies will often demand slow payment terms, which means it can be several months between paying employees and suppliers your end and receiving payment for your services. It is important to remember that even if you have agreed 30 day payment terms the cash will usually come in quite a but later than that. This is particularly problematic in the current economic climate where banks are reluctant to lend money to tide you over the interim period.
If a large proportion of your business is geared to fulfilling one large contract you leave yourself exposed should the large company you are dealing with has financial problems themselves.
Also, if you have to neglect your traditional client base whilst you complete the large contract you may find you have no business left one the contract is finished.
Now, I am not suggesting you never bid for large contracts. What I am saying is go into the process with your eyes open. Put away your rose tinted spectacles and examine fully what winning the contract will truly mean for your business. Are you prepared to accept the risks as well as the rewards?
Finally, there are professionals out there – such as your accountant – who can help you, so use them.
Fiona 🙂
Will HMRC help you get over the Floods?
Will it ever stop raining!
But help is at hand, HMRC launched their helpline (12/2/14)
The helpline will enable anyone affected to get fast, practical help and advice on a wide range of tax problems they may be facing.
HM Revenue and Customs (HMRC) will also:
- agree instalment arrangements where taxpayers are unable to pay as a result of the floods;
- agree a practical approach when individuals and businesses have lost vital records to the floods;
- suspend debt collection proceedings for those affected by the floods;
- cancel penalties when the taxpayer has missed statutory deadlines.
The helpline is in addition to other HMRC telephone contact numbers.
The helpline is 0800 904 7900. Opening hours are Monday to Friday, 8.00 am to 8.00 pm; Saturday and Sunday, 8.00 am to 4.00 pm, excluding bank holidays.
I hope the weather improves soon and your business can keep going and survive the storms.
steve@bicknells.net
Garden bagging – profit from property development in your back yard
The rate of new housing required to meet demand in England is now estimated at between 240,000 and 245,000 units a year, an increase of 10,000 new homes annually on previously accepted figures.
Gazumping and other nasties that flourished in the last property boom are making a return, as competition for homes increases with the bringing forward of the second phase of Help to Buy.
So now could be the time to sell off your garden:
- Its a way of building homes without building on the Green Belt
- It can be a zero risk way to make money if you sell the plot
Garden Bagging works as follows:
- Home Owners with suitable land approach a local builder
- The builder buys the right to seek planning permission for a nominal fee
- If the application is successful the builder will pay up to 85% of the open market value of the consented plot less his costs
Alternatively you could develop the plot yourself for a typical self build its estimated that 35% would be the land cost, 40% build cost and 25% profit margin.
steve@bicknells.net
5 reasons why Freelancers are taking over the world
Recently Zero Hours Contracts were in news, the BBC reported on 5th August 2013:
The Business Secretary Vince Cable fears zero-hours contracts are being abused after research suggested a million people could be working under them.
I think that employers may be tempted to switch from Zero Hours to Freelance Contractors.
PCG published this story on 3rd July 2013:
Demand from UK businesses for contract workers is continuing to rise in 2013, which could be good news for freelancers looking to get their foot in the door on a lucrative new project.
Why is it attractive to use Freelancers?
- Skill is more important than location in many business sectors – we live in world where internet can allow you to work with anyone at anytime, you can now track down the best person to work with even if they live thousands of miles away
- Lower fixed costs – Using Freelancers will lower your fixed costs (in similar way to Zero Hours Contracts), you employ them for a specific project and only pay for what you need so there isn’t any surplus capacity
- Tax advantages – Freelancers run their own business and that means they pay less tax than employees. Employers save tax too, such as Employers NI.
- Competitive Advantage – You can put together a team for a contract rather than finding contracts that fit your workforce, this means you can hire the best.
- 110% Commitment – A Freelancers success and future work depends on them performing to the highest level on every contract, failure is not an option for a successful contractor.
So is it a mission impossible for salaried employees to make the transition to Freelancers
steve@bicknells.net
Are you ready for an HMRC Employer Compliance Check?
HMRC check 30,000 UK businesses each year for Employer Compliance Checks, will it be your turn next. HMRC usually find something wrong, lets face it with the best will in the world mistakes happen – HMRC have collected £20.7bn overall in record compliance as shown in this infographic.
Why not ask a CIMA Accountant to check on Status/Employer Compliance matters we can:
- Discuss areas of concern with you
- Prepare new procedures
- Apply for Dispensations
- Help you disclose errors and reduce penalties
- Carry out a Full Risk Assessment & provide Recommendations
You never know you we might even find errors in your favour and be able to get a refund.
steve@bicknells.net
Does your accountant understand Construction?
![fotolia_1931265[1]](https://cimaaccountant.files.wordpress.com/2013/09/fotolia_19312651.jpg)
Perhaps one of the most important things an individual can do when self-employed is to keep meticulous accounts. This means not only keeping a record of income and expenditure, but also work in progress at the end of the tax year. The case of Mark Smith v HMRC [2012] TC02321, which was an appeal heard in the First Tier Tribunal of the Tax Chamber illustrates the potential ramifications of failing to keep one’s accounts in sufficient order.
The appellant in this case was trading as a builder. He sought to appeal against assessments to tax and amendments to self-assessments in respect of the years ending 5 April 2001 to 5 April 2007 inclusive.
The central issue before the tribunal related to the appellant’s computation of profits. It was admitted that his accounts understated the profits gained in a particular tax year. However, it was his contention that this was a “one-off”. Nevertheless, in following years, his assessments were raised in an effort to make good the profits previously understated. The question was whether these assessments were justified.
In the construction industry, building projects can last for several months or years, generally, each month the contractor will submit an application for payment to the client based on their assessment of the work. When and if the client agrees they will certify the work and make payment, if they disagree a lower amount will be certified. The certification process can often take up to 3 weeks.
The Contractors Quantity Surveyor will prepare a report known as a Cost Value Reconciliation (CVR) or Cost Value Comparison (CVC). These will show the value of the work completed to a set date (whether certified or not) and the profit, here is an example
http://www.online-templatestore.com/store/Free/Cost%20vs%20Value%20Report.pdf
Often a CVR will list every sub-contract package and the materials ordered in great detail compared to the tender and stage of completion.
The underlying principle is that of ‘matching’ costs and revenue to allow the accountant to accrue for costs and adjust revenue (accruing Income).
The decision
The tribunal held that HMRC’s assessments were in fact justified. In relation to quantum, the tribunal confirmed that the burden of proving the amount assessed lay with the taxpayer. In this case, the appellant failed to adduce evidence sufficient to displace the assessments made by HMRC. Accordingly, the assessments were confirmed and the appeal was dismissed. The appellant therefore remained liable in the amount as assessed by HMRC.
The reason why HMRC were successful was that in the case of Mark Smith he based his income on certified revenue, this meant that the profit was understated, within Construction “UK GAAP” requires revenue to be reported on application based on the CVR matching approach.
The details of the additional profits and tax for each year are as follows:
(1)2000/01: additional profits of £43,189 giving rise to tax of £17,275.60
(2)2001/02: additional profits of £65,205 giving rise to tax of £24,972.02
(3)2002/03: additional profits of £73,889 giving rise to tax of £27,737.86
(4)2003/04:additional profits of £70,023 giving rise to tax of £27,503.41
(5)2004/05: additional profits of £70,000 giving rise to tax of 27,704.18
(6)2005/06: additional profits of £65,240 giving rise to tax of £26,735.44
(7)2006/07: additional profits of £45,541 giving rise to tax of £18,671.81
Who bears the burden of proving excessive assessments?
In establishing discovery assessments, HMRC bears the burden of demonstrating that they are valid. However, if an individual taxpayer believes the assessment to be excessive, the burden then shifts to that individual to prove that is the case.
Section 50(6) of the Taxes Management Act 1970 provides that:
“If, on an appeal notified to the tribunal, the tribunal decides—
[…]
(c) that the appellant is overcharged by an assessment other than a self- assessment, the assessment shall be reduced accordingly, but otherwise the assessment shall stand good.”
In other words, once HMRC makes an assessment, the amount of that assessment stands unless the individual taxpayer can prove on the balance of probabilities (through the production of evidence) that the assessment should be different.
In this instance, HMRC had substantially underestimated the appellant’s profits for the year 2004/05. The appellant submitted that his underestimation for profits in 2004/05 was a ‘one-off’, and therefore did not warrant any adjustment for other years. It was for him to prove this. He was unable to do so and failed to adduce any evidence. HMRC concluded that the appellant had been gravely negligent in the conduct of his tax affairs and that further assessments were therefore justified.
Additionally, the appellant seemed to provide no explanation to the Tribunal to account for the under-declaration. There may have been a legitimate reason for this, and had his accounts been kept consistently throughout the period in question, he would have perhaps had evidence capable of proving to the tribunal that the error was in fact a sole incident.
This is a joint blog between Rebecca Broadbent (Practice Manager, Chambers of Jason Elliott [Barristers]) and Steve Bicknell
Business Accountant 