Questions and answers on the TPP, October 20204
We supported our Tax Partner Pro members via email and callback service. Here’s a look at some of the most recent questions we answered in October 2024.
Q
Our client incorporated a rental portfolio into a limited company but made an unrealized gain on incorporation due to the remortgaging of the properties.
I understand that the latent gain is subject to CGT, but is the gain declared at the normal CGT rate (10/20%) or the residential property rate (18/28% in the year it is ‘realized)? Additionally, how is CGT reported? I suppose if the unrealized gain is based on setting up a business and at 10/20% then it would be via a tax return, but if it is property do we need to file a return of property within 60 days of formation, and is this a single return for the entire portfolio or an individual return for each property concerned?
A
From your email it is my understanding that here the equity in the property rental business was not sufficient to cover the capital gains and therefore left unpaid gains payable on the transfer.
Here the individual will have their business assets which, as they are residential properties, will be subject to the residential property rates of 18/28%. This would therefore follow the usual obligations of the CGT regarding the transfer of properties, such as the 60-day report.
Q
I noticed an error on accounts submitted by a new Ltd co customer:
- The sale of 20k in turnover was in fact intended for an installation transfer.
The required log was:
Dr 20000 Sales
Cr 20000 Disposal
Cr 25000 Plant
Dr 5000 Depn on disposal
Dr 20000 Elimination
The company is in deficit every year – the same would apply for a slight adjustment of the CT loss, cf.
You want to file on 12/31/23 this month
Should we re-list every 31/12/22 and file again with Co House/HMRC
Or can we publish a restatement in the 2023 accounts for 2022 and file it (adjusting the tax loss if necessary this year)
I would prefer not to have a new deposit if that is an option.
A
We cannot comment from an accounts perspective in relation to Companies House filings, but we can comment from a Corporation Tax/HMRC perspective.
Essentially, from what I understand from your email below, the accounts submitted with the CT600 for the year December 31, 2022 were incorrect.
As the CT600 was originally submitted with an incorrect loss figure, you will need to amend the original declaration to reflect the correct loss figure to report. You cannot make adjustments in future tax returns to correct previous errors.
Q
We have a client who is a limited company whose income comes primarily from property (plus a small amount of share income).
Several years ago, the company provided a loan to another company. I am not sure of all the details as they were before our time, but it was certainly a loan of money totaling £120,000. The other company has no connection (I believe it was indeed an “investment opportunity” structured as a loan).
They can recover a small amount of £20,000 but not the rest, which is why we are writing off the £100,000 in this year’s accounts.
Just wanted to check whether the amount written off is admissible or not in case of NLTR debit? I can’t say from what I’m reading whether only banks etc would be able to make a claim, or whether any lending of money not to a related party is covered?
The client realized a capital gain during the year by selling certain properties. It is therefore relevant to know whether the NTLR loss could be compensated with the gain.
A
We assume that the entities are all UK resident for tax purposes.
I recommend requesting a copy of the loan agreement between your client company and the third party to ensure it is a formal loan.
Additionally, I think I would ask the corporate client to confirm whether they complied with company law, Financial Conduct Authority regulations and anti-money laundering regulations when providing the loan in first place. As this loan was made prior to your appointment as an agent of the Company, you would like to ensure that these issues have been covered.
From a tax perspective, if the companies are unrelated, writing off the remaining debt would normally mean that the lender would have a non-commercial lending debtor relationship. Whether this qualifies for corporate tax depends on the business rationale for making the loan and forgiving the loan. The lending relationship regime contains various anti-avoidance rules, which can be found in Chapter 15, Part 5 of the CTA 2009. For ease of understanding (as tax law can be unnecessarily complex), here is a link to the summary CFM38000 from HMRC.
If the debit of the non-commercial loan relationship is permitted and this results in the company having a deficit in the non-commercial loan relationship during the accounting period, an application can be made to offset this loss against the total profit ( including taxable gains) of the business. .
Assuming that the shareholder has no relationship with the third party in any capacity, it may be difficult for HMRC to argue that the delisting creates an indirect, taxable distribution in the hands of the shareholder.
If the loan appears non-commercial there could be other issues such as a director’s benefit under section 201 ITEPA 2003 or falling under the disguised remuneration regime under Part 7A ITEPA 2003, j So I hope that’s not the case.
Q
My client operates a restaurant and charges a discretionary service fee on the gross invoice amount, which includes VAT. We want to make sure that we only pay employee income tax out of the trunk. Could you please advise if this approach is correct, or should we calculate the service charge on the net amount excluding VAT?
Additionally, could you share the HMRC rules and regulations on this, along with the relevant links?
A
How the discretionary service is calculated is at the discretion of the business, this can be on the NET VAT amount or the VAT inclusive amount. What is key is that for VAT purposes the service charge is optional in order to be VAT free, see TVASC06130 for comments on this point.
Income tax and NIC treatment is not VAT related – for the service charge to be exempt from NIC Class 1, the gratuity/offer must meet the exclusion conditions under paragraph 5 or Part 10 of the Social Security Contributions Regulations 2001 – (see exercise below).
Under the new legislation, the Employment (Allocation of Tips) Act 2023, which comes into force on 1 October 2024, the employer must pass on the full amount of discretionary service charges to employees. If you are using an independent TRONC system, this must be transmitted in full to the Troncmaster in order to maintain the free NIC processing as mentioned above. If paid via the employer’s PAYE scheme, this will represent income for both tax and Class 1 NIC (ee and er).
Relevant legislation:
Employment (Granting of Tips) Act 2023
Extract from SSCR 2001, Sch 3, Part X, Para 5:
Tips and offers
5.
(1) A payment of or in respect of a gratuity or offer that:
(a) satisfies the condition of either subparagraph (2) or (3); And
(b) does not fall within subsection (4) or (5).
(2) The condition set out in this paragraph is that the payment:
(a) is not carried out, directly or indirectly, by the Secondary Contributor; And
(b) does not include or represent amounts previously paid to the Secondary Contributor.
(3) It is a condition of this paragraph]that the secondary contributor does not allocate the payment, directly or indirectly, to the beneficiary.
(4) A payment made to the employee by a person related to the secondary contributor falls within this subsection unless:
(a) it is—
(i) made in recognition of personal services rendered to the related person by the employee or by another employee employed by the same secondary contributor; And
(ii) in an amount similar to that which could reasonably be expected to be paid by a person who is not so bound; Or
(b) the person making the payment does so in his capacity as trunk master.
(5) A payment made to the employee falls within this subsection if it is made by a trustee holding property for any person that includes, or any class of persons that includes, the employee.
In this subparagraph, “administrator” does not include a trunk master.
(6) A person is related to the secondary contributor for the purposes of this subsection if his or her relationship with the secondary contributor, or where the employer and the secondary contributor are different, with either, is as described in subsection (2), (3), (4), (5), (6) or (7) of section 839 of the Tax Act (related persons).
