The good news is you can reclaim VAT added to certain expenditure that was paid out prior to your business registration for VAT. HMRC’s instructions on this issue confirm:

There is a time limit for backdating claims for VAT paid before registration. From your date of registration, the time limit is: 4 years for goods you still have, or that were used to make other goods you still have, and 6 months for services. It may also be possible to improve matters by backdating registration in some cases – although you would need to take into account potential output tax liability on sales not previously liable to VAT.

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including: invoices and receipts, a description and purchase dates and information about how they relate to your business now.

You can’t reclaim VAT for:

• anything that’s only for private use
• goods and services your business uses to make VAT-exempt supplies
• business entertainment costs
• anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system)
• goods sold to you under one of the VAT second-hand margin schemes

You will need to reduce your claim if goods or services have a mix of business and private use. There are also special rules for reclaiming VAT on single pieces of computer equipment, aircraft, ships and boats costing more than £50,000; or land and buildings costing £250,000 or more (before VAT).

In a recent tax case, Jerome Anderson v HMRC, the First-Tier Tribunal denied a football agent relief for trading losses. The judges’ arguments centred on the issue of whether he was carrying on a trade, and if he was, was it on a commercial basis with a view to making profits?

There is already legislation in place that restricts any relief for trading losses if the trade is not commercial. The facts of the case were as follows:

• Mr Anderson (Mr A) worked successfully as a football agent for many years, representing a number of big name players such as Dennis Bergkamp and Thierry Henry. 
• In January 2009 Mr A paid £3 million to Bafana, a soccer academy in South Africa, through a scheme marketed by a Jersey company.
• In return for the money paid he was able to choose three players from the academy, securing an interest for himself in any future transfer fees.
• Bafana went into administration in 2011 and Mr A received no significant income.
• Mr A claimed trading losses of £3 million in his 2008/09 tax return.

HMRC disallowed the losses.

Despite Mr A’s arguments that his activities under the Bafana scheme constituted a trade, and that he was more than a passive investor, the court agreed that the losses should be disallowed. Evidence pointed to a scheme to avoid tax rather than a genuine commercial undertaking.

Any buy to let landlord that presently claims a tax deduction for mortgage interest is likely to be adversely affected by changes in the tax rules from April 2017.

In previous blogs we have pointed out that from April 2017, finance charges (including mortgage interest) will gradually be disallowed as a deduction when computing a buy to let landlords tax bill. From 2020-21, all finance charges will be disallowed, and in their place, landlords will be able to claim a reduction in their tax due based on 20% of the finance costs disallowed.

This is a radical shift in the tax position of buy to let landlords especially those who are highly geared – they have borrowed heavily to expand their rental property portfolio.

Higher rate taxpayers will be denied full tax relief on their mortgage interest payments (they will be restricted to a basic rate deduction), and some landlords may find themselves paying tax at higher rates even though there may be no increase in their overall profitability.

What to do?

Initially, landlords should take advice to quantify the impact of these changes on their annual tax bills leading up to 2020-21.

Next, they should consider the effectiveness of incorporating their property business. Companies are not affected by these tax changes.

Not all buy to let landlords will benefit from incorporation. For some, the conversion and ongoing costs of incorporation will be more than any savings of additional income tax payable.

The change, from sole trader or partnership to a limited company, is not a process for the faint-hearted. It is something that must be planned carefully to avoid possible stamp duty and capital gains tax on-costs. Please contact us if you would like to consider the possible benefits of incorporation for your portfolio. The clock is ticking.

Lending money to your company

If you lend money to your company, the tax effects are as follows:

·         Your company will not pay corporation tax on the money you lend it.

·         If your company pays you interest on the loan, it will need to deduct income tax at 20% from the interest it pays you, and remit the tax deducted on a quarterly basis to HMRC. You will need to declare the interest received on your tax return. Your company can deduct the gross interest paid as a business expense.

Borrowing money from your company

If you borrow money from your company, the tax consequences are more complex. The following notes copied from HMRC’s website cover the basics, but if you are considering this course of action you should seek professional advice before withdrawing funds.

If the loan was more than £10,000

If you’re a shareholder and director and you owe your company more than £10,000 at any time in the year, your company must:

• treat the loan as a ‘benefit in kind’
• deduct Class 1 National Insurance

You must report the loan on your personal Self-Assessment tax return. You may have to pay tax on the loan at the official rate of interest.

If you paid interest below the official rate

If you’re a shareholder and director, your company must:

• record interest you pay below the official rate as company income
• treat the discounted interest as a ‘benefit in kind’

You must report the interest on your personal Self-Assessment tax return. You may have to pay tax on the difference between the official rate and the rate you paid.

Corporation Tax

If your overdrawn loan account has not been repaid nine months and one day after the end of your accounting period, your company will have an additional corporation tax bill to pay.

When the loan is subsequently cleared, your company can reclaim the additional Corporation Tax it has paid. You can’t reclaim any interest paid on the Corporation Tax.

It is not difficult to gauge the focus of our tax collectors. Since the Brexit vote, 23 June 2016, and the change in government leadership, HMRC have published a number of consultation documents, all issued during August 2016. Prior to the Brexit vote, there were a smattering of consultations, but none issued after 23 May 2016.

The focus of the August postings are telling:

·         5 deal with tightening sanctions against tax avoidance and evasion.

·         7 deal with “Making tax digital”

The balance deal with a number of miscellaneous items.

It would seem that the new cabinet, and Philip Hammond in particular, may be considering new powers to tackle the so-called “black economy” and businesses that take advantage of offshore tax shelters to avoid UK taxes.

However HMRC promotes the “Making tax digital” agenda, primarily by arguing that simplifying tax management for taxpayers will ease compliance etc., if small and medium sized businesses are required to file information on a more regular basis, this will provide HMRC with a raft of new data that they will no doubt use to identify tax avoiders.

The recent publicity regarding the use of tax havens by large corporations to shift profits into low tax jurisdictions highlights efforts by the international community to tackle this problem. In particular, the efforts of the OECD to establish country-by-country reporting standards.

Encouraging the estimated 10% of economic activity in the UK that is presently under-declared, and therefore under-taxed, into the light of compliance is another matter. And one that will no doubt be of concern to the Treasury under Philip Hammond’s leadership.

All of those interested in the impact of tax on UK business will be waiting to see how these consultations by HMRC convert into new legislation. Perhaps the autumn statement, due to be released 23 November, will clarify the thrust of tax assessment and collection post Brexit…

Legal responsibilities

We are often asked to clarify the responsibilities that directors take on when they agree to become directors of limited companies. A summary of directors’ duties published on the GOV.UK website are reproduced below.

As a director of a limited company, you must:

• try to make the company a success, using your skills, experience and judgment
• follow the company’s rules, shown in its articles of association
• make decisions for the benefit of the company, not yourself
• tell other shareholders if you might personally benefit from a transaction the company makes
• keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
• make sure the company’s accounts are a ‘true and fair view’ of the business’ finances
• file your accounts with Companies House and your Company Tax Return with HMRC
• pay Corporation Tax
• register yourself for Self-Assessment and send a personal Self-Assessment tax return every year – unless it’s a non-profit organisation (e.g. a charity) and you didn’t get any pay or benefits, like a company car

You can hire other people to manage some of these things day-to-day (e.g. an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

Another issue that is frequently asked is what information about the company should be displayed on business signs and stationery. From the same source these are:

Signs

You must display a sign showing your company name at your registered company address and wherever your business operates. If you’re running your business from home, you don’t need to display a sign there. For example, if you are running 3 shops and an office that’s not at your home, you must display a sign at each of them.

The sign must be easy to read and to see at any time, not just when you’re open.

Stationery and promotional material

You must include your company’s name on all company documents, publicity and letters.

On business letters, order forms and websites, you must show:

• the company’s registered number
• its registered office address
• where the company is registered (England and Wales, Scotland or Northern Ireland)
• the fact that it’s a limited company (usually by spelling out the company’s full name including ‘Limited’ or ‘Ltd’)

If you want to include directors’ names, you must list all of them.

If you want to show your company’s share capital (how much the shares were worth when you issued them), you must say how much is ‘paid up’ (owned by shareholders).

George Osborne’s summer budget 2015, and the subsequent Finance (No2) Act 2015, introduced far ranging changes to the income tax relief that can be claimed by individual landlords for finance costs.

George believed that property landlords were adding too much inflationary pressure to the UK’s housing stock. To remedy this, he set out to reduce the income tax relief available to buy-to-let landlords; after all, income tax relief for home owners has been denied for many years. It is intended that this levelling of the playing field will enable home buyers to compete more effectively as the demand from marginal buy-to-let investors is reduced.

This change has teeth, sharp teeth. From 6 April 2017, landlords (subject to income tax on their letting profits) will gradually lose the right to claim a deduction for finance costs: these are primarily, but not limited to, mortgage or loan interest payments. In its place, landlords can claim a tax credit based on 20% of the disallowed costs.

At a stroke this will deny higher rate tax relief on the disallowed costs. The reduction is to be introduced in stages starting April 2017 and be fully implemented by April 2020.

The changes also have a rather insidious side effect. Under certain circumstances, basic rate taxpayers will find themselves promoted to the higher rate tax band, and this with no increase in rental profits. Those most at risk are landlords who have borrowed heavily to grow their property portfolios and have high levels of rental income matched by high levels of finance costs.

This article is a repeat of our past exhortations to landlords: start planning for these changes now.

If your circumstances fit the most unfavourable combination of rental income to finance costs the effects on your income tax liabilities could be dire. This point cannot be overemphasised; for no change in your property business profits you may experience significant increases in tax due.

Planning is key. If you are concerned that you may be affected, please call.

Philip Hammond has announced the date for the Autumn Statement: 23 November 2016.

In the past, Chancellors have used the occasion to set the scene for the following years’ budgets. This year, Philip Hammond will be disclosing the fiscal direction of the new Conservative government. Are we to have evermore “austerity”, cuts in government expenditure, or will the Treasury abandon its commitment to reducing debt and balancing UK’s books?

No doubt the economic effects of Brexit will weigh heavily on the argument: can we afford to suppress economic activity if we are facing the loss of the EU single market?

All eyes will be on Philip Hammond as he rises to speak on the 23^rd. A lot hangs on what he says. 

The Financial Secretary to the Treasury, Jane Ellison MP, announced last week that HMRC has collected £3 billion up-front from tax avoiders. The move continues the government clampdown on tax avoidance following last month’s announcement that enablers of tax avoidance will face tough new sanctions.

The 60,000 accelerated payment notices (APNs) issued since the new rules were introduced in 2014, have required tax avoidance scheme users to pay up £3 billion of disputed tax upfront while their tax affairs are investigated by HMRC.

Under the scheme, which removes the economic advantage of taking part in tax avoidance, a taxpayer with an outstanding tax bill has 90 days once an APN is received to pay up or make representation to HMRC if they consider the notice incorrect.

Speaking at HMRC’s stakeholder conference today the Financial Secretary said:

I’m delighted to announce that we’ve collected £3 billion upfront since 2014 from people using avoidance schemes as HMRC puts its new powers to use.

The vast majority of avoidance schemes just don’t work. We’re determined to change the economics of tax avoidance by making it harder for the dishonest minority to cheat the system – collecting disputed tax upfront and tough new sanctions for enablers of tax avoidance will mean people will think twice.

HMRC has successfully defended the accelerated payment rules in five out of five Judicial Review challenges. With HMRC winning almost 90% of avoidance litigation cases brought against it, the vast majority of individuals choose to settle their tax bill rather than entering into lengthy and costly litigation.

In the latest High Court ruling brought by tax avoidance scheme users, HMRC’s decision to issue APNs on a scheme that companies had used to try to reduce their tax bill was challenged by arguing that the tax authority hadn’t properly arrived at the amounts included in the APNs. The Court ruled in HMRC’s favour. This decision means that an estimated £28 million in disputed tax will be protected.

This year has seen HMRC win several large scale tax avoidance cases, including a win against Eclipse 35 worth £635 million.

There are a number of considerations that home owners will need to consider if they are letting out part of their home. The following points cover some of the more obscure situations that can arise:

I’m a tenant. Can I sublet part of the property or take in lodgers?

If you are a secure council tenant, you have the right to take in a lodger, but cannot sublet part without the council’s written permission, you cannot sublet the whole of a secure tenancy. If you are a private tenant, you should check the terms of your tenancy. If there has been nothing agreed to the contrary, the tenant would be free to sublet. However, in practice most private tenancies prohibit subletting: because there is something in the written tenancy agreement to this effect (either absolutely or without the owner’s permission) and/or because assured (including assured shorthold) periodic tenancies have this prohibition implied. But a tenant can of course ask his or her landlord for permission anyway. A tenant who has sublet in defiance of these prohibitions cannot use this as justification for denying his own tenant or licensee her rights, for example by evicting her illegally. Also, these restrictions only apply where the intended arrangement is for the tenant to “part with possession” of some of the property: if, for example, you were informally having a friend to stay, or taking in a lodger who you would be providing services to, you would probably not be giving exclusive use of any of the accommodation. Again, if any of these types of tenancies comes to an end, so generally will the sub-tenancy.

Will my home insurance cover be affected if I let part of my home?

It is very likely that insurance premiums will be increased by allowing someone to share the home, because of factors such as accidental damage. It is extremely advisable to check for both contents cover and building cover; and if existing arrangements will not provide cover if part of the property is let, to arrange to extend the cover.

Do I need planning permission or other consent from the local council?

You would not need planning permission simply for letting rooms, so long as the property remains primarily your home: but there could be a planning consideration if you were to use it mainly to earn money from letting accommodation.

What facilities should be provided?

You are free to decide most of these things with the person you let to, subject to the basic requirements of general housing law: you should provide access to kitchen, washing and toilet facilities (but these can be either the ones that you use or separate).

Does there have to be an agreement in writing?

Not unless the let is a tenancy for a fixed term of more than 3 years. But it is advisable to have one anyway, as this will make it easier to sort out any disagreements which may arise later. Even if there is nothing in writing, both parties must still do whatever they agreed to, except where this conflicts with their overriding legal rights and responsibilities.