We have supported our Tax Partner Pro members via email and call-back service. Here’s an overview of some of the more recent questions we have answered during October 2024
Q
Our client incorporated a rental portfolio into a limited company but had a latent gain during incorporation due to remortgaging properties.
I understand the latent gain is subject to CGT, but is the gain reported as normal CGT rates (10/20%) or residential property rates (18/28% in the year they did it)? Additionally, how is the CGT reported? I assume if the latent gain is based on the incorporation of a business and at 10/20% then it would be done via a tax return, but if it is done as a property, do we need to complete a property return within 60 days of incorporation, and is it one return for the whole portfolio or an individual return for each property involved?
A
From your email my understanding is that here the equity in the property rental business was not sufficient to cover the capital gains and therefore left outstanding gains payable on the transfer.
Here the individual will be disposing of the assets of their business which, as they are residential properties, will be subject to the residential property rates of 18/28%. Therefore would follow the usual CGT obligations of disposing the properties, such as the 60 day reporting.
Q
I noted an error on a new Ltd co client’s submitted accounts as follows:
- 20k Sale in turnover was in fact for a disposal of plant.
Journal Required was:
Dr 20000 Sales
Cr 20000 Disposal
Cr 25000 Plant
Dr 5000 Depn on Disposal
Dr 20000 Disposal
Company is loss making in all years – so would be a slight adjustment to CT loss cf.
Looking to File 31/12/23 this month
Should we re state all 31/12/22 and re file with Co house /HMRC
Or can we post some restatement in 2023 accounts for 2022 and file that (adjusting tax comp loss where necessary this year)
Would prefer not to have refile if that is an option.
A
We can’t comment from an accounts perspective in regards to Companies House filings but we can comment from a Corporation Tax perspective/HMRC.
Essentially from what I understand of your email below is that the accounts submitted with the CT600 for the y/e 31 Dec 2022 were incorrect.
As the CT600 was submitted with an incorrect loss figure originally, you will need to amend the original return to reflect the correct loss figure to carry forward. You are not able to make adjustments in future Tax Return’s for previous errors.
Q
We have a client that is a limited company with income mainly coming from property (plus a small amount of income from shares).
The company, several years ago, made a loan to another company. I’m not sure of all the details as it was before our time, however it was definitely a loan of money, total £120,000k. The other company is not connected in any way (I think it was effectively an ‘investment opportunity’ structured as a loan).
They may get back a small amount c£20,000 but not the rest, so we are writing off the 100K in this year’s accounts.
I just wanted to check if the amount written off is allowable a an NLTR debit or not? I can’t tell from what I’m reading if only banks etc would be able to claim, or if any loan of money not to a connected party is covered?
The client had a capital gain in the year as they sold some properties so it is relevant in terms of whether the NTLR loss could be offset against the gain.
A
We assume that the entities are all UK resident for tax purposes.
I would recommend that you ask for a copy of the loan agreement between your client company and the third party to ensure that this was a formal loan.
Additionally, I think I would seek confirmation from the client company as to whether they complied with company law, Financial Conduct Authority regulations and Anti-Money Laundering regulations when they made the loan in the first place. As this loan was made before your appointment as agent of the Company, you want to ensure that these matters were covered.
From a tax perspective, if the companies are not connected, the waiver of the remaining debt would ordinarily mean that the lender would have a non-trading loan relationship debit. Whether this is allowable for corporation tax depends on the commercial justification for making the loan and for waiving the loan. The loan relationship regime contains various anti-avoidance rules- which can be found in Chapter 15 Part 5 CTA 2009. For ease of understanding (as tax law can be unnecessarily complex) here is a link to HMRC’s summary CFM38000.
If the non-trading loan relationship debit is allowable and if this results in the company having a non-trading loan relationship deficit in the accounting period, a claim can be made to offset this loss against total profits (including chargeable gains) of the company.
Assuming the shareholder is not involved with the third party in any capacity, it may be difficult for HMRC to argue that the write off creates an indirect distribution, taxable in the hands of the shareholder.
If the loan appears uncommercial, then there could be other issues such as a benefit on the director under s.201 ITEPA 2003 or fall within the Disguised Remuneration regime under Part 7A ITEPA 2003 so I am hopeful this is not the case.
Q
My client operates a restaurant and charges a discretionary service charge on the gross amount of the bill, which includes VAT. We want to ensure that we are only paying income tax on the tronc for the employees. Could you please advise if this approach is accurate, or do we need to calculate the service charge on the net amount excluding VAT?
Additionally, could you share the rules and regulations from HMRC regarding this, along with relevant links?
A
How the discretionary service is computed is at the discretion of the business, this can be on the NET of VAT amount or VAT inclusive amount. What is key is that, for VAT purposes, the service charge is optional in order to be exclusive of VAT, see VATSC06130 for commentary on this point.
The income tax and NIC treatment is not linked to VAT – for the service charge to be free of class 1 NIC, the gratuity/offering must meet the conditions of the exclusion under para 5 or part 10 of the Social Security Contribution Regulations 2001 – (see below exert).
Under the new legislation, the Employment (Allocation of Tips) Act 2023 which comes into force from October 1 2024, the employer must pass on the total amount of the discretionary service charge to the employees. If using an independent TRONC scheme, this must be passed in full to the Troncmaster in order to retain the NIC free treatment as mentioned above. If paid via the employer PAYE scheme, this will represent earnings for both tax and class 1 NIC (ee & er).
Relevant legislation:
Employment (Allocation of Tips) Act 2023
Exert from SSCR 2001, Sch 3, Part X, Para 5:
Gratuities and offerings
5.
(1) A payment of, or in respect of, a gratuity or offering which—
(a) satisfies the condition in either sub-paragraph (2) or (3); and
(b) is not within sub-paragraph (4) or (5).
(2) The condition in this sub-paragraph is that the payment—
(a) is not made, directly or indirectly, by the secondary contributor; and
(b) does not comprise or represent sums previously paid to the secondary contributor.
(3) The condition in this sub-paragraph] is that the secondary contributor does not allocate the payment, directly or indirectly, to the earner.
(4) A payment made to the earner by a person who is connected with the secondary contributor is within this sub-paragraph unless—
(a) it is—
(i) made in recognition for personal services rendered to the connected person by the earner or by another earner employed by the same secondary contributor; and
(ii) similar in amount to that which might reasonably be expected to be paid by a person who is not so connected; or
(b) the person making the payment does so in his capacity as a tronc-master.
(5) A payment made to the earner is within this sub-paragraph if it is made by a trustee holding property for any persons who include, or any class of persons which includes, the earner.
In this sub-paragraph “trustee” does not include a tronc-master.
(6) A person is connected with the secondary contributor for the purposes of this paragraph if his relationship with the secondary contributor, or where the employer and secondary contributor are different, with either of them, is as described in subsection (2), (3), (4), (5), (6) or (7) of section 839 of the Taxes Act (connected persons).
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