Where you personally own the premises your business trades from, it has historically always been considered sensible to charge rent to avoid national insurance. However, on ultimate exit from the business there may be a tax issue on entrepreneurs’ relief. This is only a problem if the sale of the business itself does not generate a gain of at least £1 million.

You can claim relief on the sale of the business premises if this is linked to a sale of the business, but if full rent has been charged on the property, no relief is due.

The good news is that rents received prior to April 2008 can be ignored.

Furthermore, if full market rent has not been charged, relief is still allowed but in proportion to the discount from market rent. If this is likely to be an issue, this may be a good time to review the position.

Cathy Corns is a tax adviser and a partner at Mercer & Hole. The views given in this blog are personal to the author, if you would like to discuss the contents of this blog with Cathy you can call her on 01908 605552.

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When buying property abroad it is often necessary to set up a company to own that property – either because non-residents are not allowed to own property in a particular country, or to avoid unwelcome inheritance issues.

In the past this has often given rise to additional tax. The owner was likely to be a director, or deemed to be a shadow director, of the company and so taxable under the benefits-in-kind rules on accommodation. Sometimes it was possible to argue that the company was holding the property only as nominee for the individual and effectively “look through” the company, but this was generally more difficult if the property was being let out to other people for part of the year.

The legislation was changed this year to prevent a tax charge arising in certain circumstances. It is important, however, to check that your situation is specifically covered by the new legislation:

• The company must be owned by individuals.
• The company must, broadly, have owned the property all the time since the individuals acquired the company. 
• The property must be the main or only asset of the company.
• The activities of the company must relate almost wholly to the ownership of that property. 
• The company can be the subsidiary of another company as long as the holding company does nothing other than own the subsidiary.

The legislation was, unusually, wholly retrospective in effect so if you need to revise a return for an earlier year you will need to act quickly. The deadline for amending a 2006/07 return expires on 31 January 2009.
 

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With the slow down in the property market, many businesses are unable to sell newly constructed property. The obvious solution is to try and rent in the short term until buyers can be found. However, this course of action could lead to a hidden VAT cost.

The sale (freehold or lease exceeding 21 years) of a new dwelling by the person constructing is zero rated for VAT purposes. This means that VAT incurred on the construction of such buildings is recoverable. In practice this may only be the VAT on legal and other professional fees, as most of the construction costs will be zero rated. However, in other cases, there could be significant VAT on builders materials.

However, if you let the building on a short term basis (any lease of less than 21 years), this will be an exempt supply. This means that you may have to pay back some of the VAT already reclaimed under the partial exemption “clawback” rules. The rules are complex but in essence, you will have to apportion the VAT already reclaimed on a fair and reasonable basis. If you do eventually sell the building, a further VAT adjustment can be made to reflect the actual use.

The clawback rules will also apply to the letting of converted property (i.e. commercial to residential). In such cases, there will be more VAT at stake as the conversion works will have been liable to VAT at 5%.

For commercial property, lettings are exempt unless you opt to tax. Prior to letting such property, you should seek professional advice as the option to tax is generally irrevocable for 20 years. This will mean that all future lettings and the eventual sale of the property will be liable to VAT. This decision could affect the marketability of the property, depending upon its location and type of buyer/tenant it is likely to attract. The rules for property and VAT are complex and the cost of getting it wrong can be very significant.

I would like to think that HMRC would take a lenient approach to this point, in the current climate. However, they are generally unsympathetic to cash flow issues, at this or any other time of economic difficulty. 

Useful links:

http://www.hmrc.gov.uk/briefs/vat/brief4408.htm

http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_PROD1_028865#downloadopt
 

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When commercial property is acquired, capital allowances may be claimed on the part of the purchase price attributable to plant and machinery, whether fixtures or moveable chattels.
Historically the way of ascertaining the amount to be allocated to plant, a “just and reasonable apportionment”, involved a specialist valuation of the various components of a purchase (land, building and plant) relating the results to the actual price paid.

The amount claimable on this basis is generally higher than buyers expectation.
However, in 1997 an alternative procedure was introduced under which the buyer and seller could jointly elect to set a figure to be treated by both parties as the disposal sale proceeds and purchase price for the fixtures. This figure is binding on HMRC and any subsequent purchaser of the property.

The main problem with the election is that it tends to benefit one party over the other.

It is generally better for the seller to put a low value in the contract – the historical allowances over this figure are then retained by him. This means that the buyer then has minimal allowances. Conversely, the buyer wants as high a figure as possible while this may have tax implications for the seller. The only answer is to negotiate – and probably compromise.

The key thing though is to understand what you are being asked to sign and to know what previous owners have signed too.

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