VAT when buying or selling a business

The purchase of a business as a ‘going concern’ is not subject to VAT. So if you continue with the existing trade in place of the seller, you do not have to pay VAT on the transfer of the trading assets.

A common example would be taking on a public house, if the changeover happens ‘overnight’ or if the pub is closed for just a day or two it would be a transfer of a going concern. However if the pub had been closed for a period of weeks, it would not constitute a transfer of an existing business.

But beware. The reason you do not need to pay VAT is that the transfer of a business is considered to be outside the scope of VAT. If the seller is advised to adopt a ‘broad brush’ approach and just charge VAT because he cannot decide if the transaction really is a bona fide sale of a going concern then you may be denied recovery of the VAT added!

It is important to clarify whether the sale is a sale as a going concerns or not. Don’t hesitate to ask us if this applies to you.

Purchasing property
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Further complications can arise if you purchase a business property which has an existing option to tax applied. This means that all income generated by the property is a standard rated output. It also means that a seller may be required to add VAT to the sale price.

However the seller can avoid this VAT add-on if one of two specific circumstances apply:

  • if the new owner makes an election to opt to tax their interest in the same property. This election must be made before ownership is transferred.
  • if the new owner is buying the property to convert to dwellings.

In both cases there are prescribed forms to fill in and file.

On your bike – tax free!

The Government has changed the “tax-free bike scheme” which has been developed in response to the “Green Transport Plan”.

Basically the employer buys a bike and hires it to the employee until it has been paid for. The repayments are made from pre-tax rather than post taxed income.

The scheme enables employees who are basic-rate taxpayers to save 40 per cent of the cost of a bicycle, and higher-rate taxpayers can save 50 per cent. When introduced in 1999, the scheme required employers to apply for a consumer credit licence, but this bureaucratic hurdle has now been removed.

Under the scheme, the employer buys the bicycle (reclaiming the VAT on the purchase) and leases the bicycle to the employee. The employee pays an agreed amount each month out of gross (pre-tax) earnings, thereby reducing the income tax and National Insurance contributions. Then, at the end of the agreement (typically, between one and three years), the employee can buy the bicycle for a nominal amount.

The scheme only applies to employees of companies, if you are self-employed the bike could probably be claimed as a business expense, if you use it for business purposes.

Tax credits – can you claim?

You may be eligible for tax credits if you fit into the following criteria:

– If you are responsible for at least one child or young person who normally lives with you, you may qualify for Child Tax Credit.

– If you work, but earn modest wages, you may qualify for Working Tax Credit.

In both cases the amount of your claim will depend on your income.

As always there is a minefield of small print to negotiate before you can establish if you have a valid claim.

Generally speaking you may qualify for some element of tax credit if the following circumstances apply:

  1. You will need to live and work in the UK
  2. Be aged 16 years or over
  3. If you don’t have children and you are under 25, you probably don’t qualify for tax credits unless your partner is 25 or over and they normally work over 30 hours a week.
  4. Your household income must not exceed £58,000 per year. Household income means money you (and your partner if you have one) have coming in each year including:
  • your wages and benefits from employment
  • any earnings from self-employment
  • any interest on savings and investments you have
  • some, but not all, state benefits
  • pensions
  • money from abroad
  • money from property you own, e.g. rent

It does not include money that other members of your household have coming in.

If your income starts to fall as a result of the current slow-down you may become eligible to claim tax credits.

It is important to realise that as a business owner to a degree you can manipulate what your income is, by purchasing capital assets (eg plant and equipment) or by making pension contributions.

Please don’t hesitate to contact us if you would like more information or to chat about this subject.

Letting your home

There is no tax relief on purchasing your own home. Where possible, business owners should try to structure their affairs so that the business has borrowings and minimise the mortgage for the home.

The mortgage is a major outgoing for most people, and both interest and capital repayments have to be funded out of our taxed income.

For example, you would need a salary of over £1,000 per month as a 20% tax payer, or more than £1,300 per month as a higher rate tax payer, to pay £800 per month of mortgage interest.

With recession starting to bite and taking into account the difficult property market, one solution might be letting either part or all of our homes. This article sets out a number of the tax considerations

Rent-a-room relief

Rent a room relief can be claimed if you let out a room in your home. The following rules should be considered.

1. If you don’t make such an election you will be taxed on the difference between the rents you charge and directly attributable costs (such as a proportion of gas, electricity, water and general rates, repairs and of course mortgage interest).

2. If you do make such an election you will be taxed on the difference between the total rents you receive and £4,250. Expenses are ignored.

Where the property is jointly owned the £4,250 will be shared between the partners, as will the rents.

In most cases it will be necessary to work out the tax charge using both methods to see which is more beneficial.

Where the rents received from letting a room are less than £4,250 per annum (£354.17 per month) the income is entirely tax free!

Letting your home.

If you decide to move from your home and let the whole property the following points should be considered.

– You will be taxed on the rents received less attributable costs. Costs will include mortgage interest paid.

– As the property has been your principal private residence any gain that you make on subsequently selling the property will be tax free until you move out plus the last three years of ownership. Consequently if you do not let for more than three years there will be no capital gains tax to pay.

– If you let for more than three years you can also make a claim for lettings relief which is currently worth £40,000. Also, the relief is available to both owners if property is jointly owned including married couples or civil partners.

You should also be mindful in both these situations that letting or part letting of the property may be prohibited by your mortgage lender.

Running your company from home

If you run your business through a limited company and your base of operations is your home office, it is possible to charge your company rent. Of course if you do this the company will be able to deduct the rents from its profits and you will need to declare the rents on your self-assessment return. There may be some expenses to offset, but on the face of it there would seem to be little advantage.

But what if you also have buy to let properties and are making losses? Very often buy to let property owners have more costs (loan interest etc) than they have rents receivable. Unfortunately it is not possible to set off these rental losses against other income. The losses have to be carried forward to be set against rental profits in future years.

If on the other hand you do charge your company rents for the use of a Home Office it would be possible to set off any buy to let losses against this income. The rents from your company and your buy to let rents are taxable as property income. Effectively you would be getting tax relief through your company for the rental losses you personally suffer on your buy to let property. A number of considerations need to be taken into account:

  1. If you charge your company rents you must have a proper rental agreement between you and your company, otherwise the revenue could seek to treat the rental payments as part of your salary from the company.
  2. The rents that you charge for your home office must be charged on a commercial basis. It may be sensible to have a formal valuation undertaken.
  3. The rental agreement should state that the office space at home is only available for fixed periods each day. This is necessary to observe the non-exclusive principle. Without this you could jeopardise your principal private residence exemption for capital gains tax purposes.
  4. If you have a mortgage, you may need to check with your lender before entering into such an arrangement

Employed or self-employed

Whether an individual is employed or self-employed is often far from clear, it is a case of shades of grey rather than “black and white”. There have been numerous court cases over the years, and the judgements in these cases form the law on this area.

HM Revenue & Customs have recently published new guidelines to help taxpayers decide if they are employed or self-employed. We have reprinted below some of the criteria that they suggest you use in order to arrive at a decision. This information might be helpful in certain situations and to certain people, however what HMR&C say is not necessarily the law. Please do not hesitate to contact us for further assistance in this complex area.

The comments that follow are quoted from the HMR&C publication.

“In most cases your employment status will be straightforward. In general terms, you are employed if you work for someone and don’t have the risks of running the business. You are self-employed if you are in business for yourself and are responsible for the success or failure of that business.

To help you check your employment status, answer the following questions. These also apply if you are a casual or part-time worker. If you have more than one job the same questions apply for each job.

Employed – if you answer yes to most of the questions you are likely to be employed:

  • Do you have to do the work yourself?
  • Can someone tell you where to work, when to work, how to work or what to do?
  • Can someone move you from task to task?
  • Do you have to work a set number of hours?
  • Are you paid a regular wage or salary?
  • Can you get overtime pay or bonus payments?
  • Are you responsible for managing anyone else engaged by the person or company that you are working for?

Self-employed – if you answer yes to one or more of the questions you are likely to be self-employed.

  • Can you hire someone to do the work, or take on helpers at your own expense?
  • Can you decide where to provide the services of the job, when to work, how to work and what to do?
  • Can you make a loss as well as a profit?
  • Do you agree to do a job for a fixed price regardless of how long the job may take?

If you can’t answer yes to any of the above questions, you are still likely to be
self-employed if you can answer yes to most of the following questions.

  • Do you risk your own money?
  • Do you provide the main items of equipment (not the tools that many employees provide for themselves) needed to do the job?
  • Do you regularly work for a number of different people and require business set up in order to do so?
  • Do you have to correct unsatisfactory work in your own time and at your own expense?”

Please note that the opinions quoted above are those of HMR&C; we do not necessarily agree with all of the comments made! If you are at all uncertain about your tax status can we suggest that you give us a call and we will provide you with advice based on your own individual circumstances.

HMRC further online incentive

From 1 October 2008 HMRC will no longer send taxpayers a postage paid envelope to use when paying their tax or filing/paying their VAT returns.

This apparently is a signal to us all to make returns and payments online.

To ease the payment process HMRC are also about to make it easier to pay our tax by allowing us to use our credit card. Legislation has just been passed that will allow them to recover the credit card charges. HMRC will charge you 0.91% for the privilege.

Capital Allowances and personal tax planning

There has been a big change to the amount small businesses can claim for tax purposes when they invest in capital items such as plant and machinery (these are known as capital allowances).

From the 6 April 2008 sole traders and partners can claim up to £50,000 a year as a direct write off against their profits if they invest in certain qualifying assets; plant and equipment, vans and so on. Small and medium sized companies can also claim (from 1 April 2008). This article alerts individuals claiming the allowance of two other matters they should consider before making a claim.

First the good news!

Tax credits

If the claim you make reduces your income sufficiently you may be eligible for tax credits.

The problem is that until the current tax year’s earnings are quantified, you will not know for certain that you are eligible to claim – a pity as you can only back date claims for three months!

The solution may be to make a protective tax credit claim now. Your initial claim can show £nil but when adjusted for your actual post AIA claim the actual claim achieved may be much higher.

(While we are on the topic, you might like to know that you can also reduce your income for tax credit purposes by paying pension contributions)

And now the bad news!

Mortgage applications

Many lenders now ask for taxable income rather than trading profits when they consider if you are eligible for a loan. If your trading profits of £50,000 are covered by an AIA claim of £50,000, zero income is not going to qualify for much of a loan. Hopefully lenders will take into account the reason for the dip in your taxable income – but some may not! You might expect the request for information from a bank or building society to be consistent and informed, however in practice the requests vary widely and often appear to ask non senseical questions.

Immediately vested pension contributions

If you are of pensionable age, (presently 55 or 50 if you were born before 6 April 1960) here is some information you could find very interesting. The illustration below shows you for example that a higher rate tax payer can start to draw an income (pension) from a fund of £37,500 at a cost of just £17,500the balance of the funding comes from the Government. You can choose to take a drawdown rather than an annuity, and in this case the funds are invested – possibly in property or on the stock market. If that fund is invested well, it could show good growth in the future – and in five or ten years time, maybe right now might prove to be a good time to make such an investment!
Qualifying pension contributions continue to attract tax relief for individuals at their highest rate, potentially 40%. Tax Relief of 20% is usually deducted from the payment you make to the pension company – they reclaim this from the Treasury. Any higher rate relief needs to be claimed via your tax return.

If you are of pensionable age, presently 55 or 50 if you were born before 6 April 1960, you can accelerate the tax and cash benefits of single, lump sum contributions by opting for an immediately vested investment.

What you do is:

(This illustration assumes that all of the qualifying contribution can be relieved at the 40% income tax rate)

  • Make a payment to a pension provider of say £40,000
  • Pension provider recovers the 20% tax deemed to have been deducted of £10,000
  • You claim an additional 20% higher rate tax relief, £10,000
  • You immediately vest the fund created (£40,000 + £10,000) after taking 25% or £12,500 as a cash free lump sum

Result:

  • You have created a fund of £37,500 (£50,000 less lump sum £12.500). You could start to take an annuity or drawdown based on this fund. The amount of the drawdown or annuity will depend on current annuity rates.
  • You have invested net funds of just £17,500 to do this. (£40,000 less higher rate tax relief £10,000 and cash lump sum £12,500)

Borrowing from your own company

If you are the owner of a company it is a breach of Company Law, except in specific circumstances, for you to borrow money from your company. Ironically there are no fines payable if you break this particular aspect of company law! However there are a number of tax consequences, two of which are outlined below.

Benefit in kind

If a director’s loan is overdrawn by more than £5,000 (you owe the company money) you will be deemed to benefit from this arrangement and suffer a benefit in kind charge as a result. This charge can be avoided if you allow the company to charge you interest on the overdrawn position. The rate of interest charged needs to be at the official HMRC rate or higher. This will of course increase the amount you owe if simply charged to your loan account and will potentially increase the company’s taxable profits.
Corporation tax

If the overdrawn position continues for more than 9 months after the end of a relevant accounting period your company’s corporation tax bill will be increased by 25% of the loan amount. For instance if the company year end was 31 December 2007 and at that time the overdrawn director’s loan amounted to £20,000, and this amount was still outstanding at 1 October 2008, you would have to pay over an extra £5,000 in corporation tax at that later date. This Section 419 liability could be reclaimed if the loan was subsequently repaid – the tax paid would actually be repaid 9 months after the accounting year end, during which the loan repayment occurs. This rule applies whether you are a director or not, and even if the loan is made to the spouse of the shareholder for instance.