The Tax Issues of Hire Purchase (HP), PCP and Leases for assets – Capital Allowances

When businesses purchase assets they normally use finance, it makes sense to conserve your cash and spread the purchase cost over the life of the asset, but how will you choice impact on whether you can claim Capital Allowances, Annual Investment Allowance or Enhanced Capital Allowances.

You can claim capital allowances when you buy assets that you keep to use in your business, for example:

  • equipment
  • machinery
  • business vehicles, for example cars, vans or lorries

These are known as plant and machinery.

You can deduct some or all of the value of the item from your profits before you pay tax.

So clearly buying assets without finance or with a business loan is fine as you will definitely own the asset.

Hire Purchase

The normal assumption is that a vehicle bought under a HP agreement will become the property of the hirer once the final payment is made at the end of the lease period.

Section 67 Capital Allowances Act 2001 (CAA 2001) allows the capitalisation of the entire expenditure on the vehicle from delivery, providing the asset was in business use at the end of the chargeable period.

However, if a payment is not made and the vehicle is not acquired then it is treated as having been disposed of by s67(4).

Q&A: hire purchase contract and capital allowances | Accountancy Daily

PCP – Contract Purchase

Under any other finance arrangement it will depend on whether the vehicle is owned or not, usually the documentation will confirm the position but a PCP is considered to be an HP arrangement with a balloon payment. If the end payment is not paid and the option to purchase not taken then that is a disposal and thus a clawback of the allowances claimed.

Contract Hire and Leases

Contract Hire will not pass ownership to hirer so they are not eligible for Capital Allowances.

But the hire costs will normally be tax deductible and generally 50% of car hire VAT can be reclaimed.

steve@bicknells.net

Is that Invoice correct or invalid for VAT?

Its a common issue, how often do directors buy things in their own name or perhaps use their personal amazon prime account for convienence.

The invoice is then addressed to them not to the company!

VIT13400 – VAT Input Tax basics: when input tax can be claimed by the business on supplies to employees

You must take care in applying the supply rule when the third party is an employee. Here are some examples of supplies made to the employer, provided the employer meets the full cost, even when it may look as if the employee has received the supply:

  • road fuel and other motoring expenses;
  • subsistence costs such as meals and accommodation necessarily paid for whilst away from the normal workplace;
  • removal expenses arising from company relocations or transfer of staff;
  • sundry items such as small tools or materials purchased on site.

This list is not exhaustive.

You should decide whether the supply is legitimately paid for by the employer for the purpose of the business. If it clearly is then input tax should be recovered. This is in keeping with the intention of the legislation.

Simplified VAT Invoices for items worth less than £250 – these invoices don’t show the customers details

Simplified invoices only need to include the following information: 

  • The name, address and VAT registration number of the supplier
  • A unique invoice number
  • The tax point, also known as the ‘time of supply’ – (This is the date that the transaction actually takes place and is used for VAT purposes. The tax point may be different from the invoice date.) 
  • A description of the products or services that are sold
  • The VAT rate of each invoiced item – (If an item is VAT exempt or zero-rated, then the invoice must show that there’s no VAT charged on that item.)
  • The total amount, including VAT

Unlike an ordinary invoice, it’s not necessary to include your customer’s name and address, or the date the invoice was issued. Other information about prices and VAT, such as the total amount of VAT, the price of each item without VAT and the pre-tax total, can be omitted. 

What if the above don’t apply and you can’t get the supplier to correct the invoice? Will HMRC reject you VAT reclaim?

First you need to keep notes of your attempts to get a valid invoice.

Then to persuade HMRC that the VAT reclaim is valid you will need to prove

  1. There has been an actual supply of goods or services to your business
  2. Your business received the goods and services and that they don’t belong to another person or business
  3. You have some documentary evidence to support the claim such as contracts, purchase orders, correspondence, you may also be able to link the purchase to a sale

VIT31200 – How to treat input tax: alternative evidence for claiming input tax

Questions to determine whether there is a right to deduct in the absence of a valid VAT invoice

  • Do you have alternative documentary evidence other than an invoice (for example a supplier statement)?
  • Do you have evidence of receipt of a taxable supply on which VAT has been charged?
  • Do you have evidence of payment?
  • Do you have evidence of how the goods/services have been consumed within your business or evidence about their onward supply?
  • How did you know the supplier existed?
  • How was your relationship with the supplier established? For example:
  • How was contact made?
  • Do you know where the supplier operates from (have you been there?)
  • How do you contact them?
  • How do you know they can supply the goods or services?
  • If goods, how do you know they are not stolen?
  • How do you return faulty supplies?

Where:

  • the supply is of goods not specified as subject to widespread fraud and abuse; and
  • the taxpayer can provide satisfactory alternative evidence of the supply (questions 1-4); and
  • there are no grounds to suspect abuse or fraudulent intent on the part of the claimant

HMRC staff should normally exercise their discretion to allow the taxpayer to deduct the input tax.

steve@bicknells.net

Commercial Property Capital Allowances Sideways Relief

IT rental business losses can be set against general income only to the extent that they are attributable to:

  • certain capital allowances,
  • certain agricultural expenses (see PIM4224).

Until the 2010-11 tax year, relief against general income could be claimed to the extent the loss was due to furnished holiday lettings. This is not available for tax years 2011-12 onwards, see PIM4130. Losses of a furnished holiday lettings business may now only be carried forward to use against future profits of that same furnished holiday lettings business.

Where a customer claims loss relief against general income, they must take the full amount of the loss available up to the amount of their general income. They can’t opt to take a smaller amount, either they claim for the full loss or they claim for none (ITA07/S121).

PIM4220 – Property Income Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The largest capital allowances are likely to be from Annual Investment Allowance claims.

Any taxpayer seeking to obtain in excess of £50,000 of otherwise unlimited income tax reliefs in any one year will find their deductions ‘capped’ (ITA 2007, s 24A). The ‘cap’ is the greater of:

  • 25% of their total income; or
  • £50,000.

steve@bicknells.net

How to offset Construction Industry Scheme deductions – CIS Offsetting (CIS340 4.13)

If you have suffered deductions from your income its generally reclaimed

  1. The Self Employed enter the CIS suffered on their self assessment return, its then part of their tax calculation
  2. Companies reclaim via their Payroll – Companies can also offset

Construction Industry Scheme: a guide for contractors and subcontractors (CIS 340) – GOV.UK (www.gov.uk) – Section 4.13

Companies that have deductions taken from their income as subcontractors should set-off these deductions against the amounts payable monthly or quarterly for PAYE, National Insurance contributions and Student Loan repayments due from their employees and CIS deductions from their subcontractors. This should be done monthly (or quarterly, as appropriate) and the calculation should be shown on the company’s EPS.

Companies should simply reduce the amount of PAYE, National Insurance contributions, Student Loan repayments and any scheme deductions they pay over to our accounts office by the amount of CIS deductions made from their income.

CIS132 – Construction Industry Scheme (publishing.service.gov.uk)

The CIS132 is used to keep a record of the offsets, you could create a spreadsheet to keep these records.

Steve@bicknells.net

How do you get an HMRC Business Government Gateway, add taxes and add an Agent?

This is a 3 stage process

1. Register for a Gateway

HMRC services: sign in or register

Enter your email address – GOV.UK (access.service.gov.uk)

You will then be asked questions and get a Government Gateway ID

You will be asked choose the type of account from these 3 options

  • Register as an Individual
  • Register as an Organisation
  • Register as an Agent

You need to register as an Organisation

2. Add PAYE/CIS, Corporation Tax, VAT

Watch this HMRC Video to see how its done

CIS is part of PAYE

You will need your Tax Reference Numbers

Company UTR

PAYE Office and Employer Numbers

VAT Number

3. Add your Accountant

Login to your business gateway

Click Manage Account – its in the horizontal menu bar at the top of the screen

Choose Accountants from the list in the middle of the screen

Click the services you wish to add us to

Corporation Tax

PAYE/CIS

VAT

Click Authorise an Agent

steve@bicknells.net

Is it Betting or Trading? CFD – contracts for differences and spread betting

Clients are always looking for new ways to make money and recently we have had a couple of clients ask how CFD’s and Spread Betting are treated for Tax Purposes.

The general rule is that its considered to be gambling unless the badges of trade are present.

BIM22016 – Meaning of trade: exceptions and alternatives: betting and gambling – what is a bet?

The first, and obvious, question is simply what is a bet? A definition of a bet or ‘wager’ was given by Hawkins J in Carlill v Carbolic Smoke Ball Company [1892] 2QB484 and has been followed in later cases:

‘It is not easy to define with precision what amounts to a wagering contract, nor the narrow line of demarcation which separates a wagering from an ordinary contract; but, according to my view, a wagering contract is one by which two persons, professing to hold opposite views touching the issue of a future uncertain event, mutually agree that, dependent on the determination of that event, one shall win from the other, and that other shall pay or hand over to him, a sum of money or other stake; neither of the contracting parties having any other interest in that contract than the sum or stake he will so win or lose, there being no other real consideration for the making of such contract by either of the parties. It is essential to a wagering contract that each party may under it either win or lose, whether he will win or lose being dependent on the issue of the event, and, therefore, remaining uncertain until that issue is known.’

BIM56900 – Financial traders – instruments and shares: contracts for differences and spread betting

Companies

Contracts for differences (CFDs) are defined in CFM50380, and this definition includes financial spread bets. CFDs fall within the definition of derivative contracts for Corporation Tax purposes, so for companies the derivative contracts regime applies in most cases.

Individuals and others not within the charge to Corporation Tax

For individuals and others not within the charge to Corporation Tax the position is different. In such cases you will need to examine the contract to see if it is a gambling or wagering one. There is guidance on this at BIM22016. The profits or losses from gambling or wagering contracts are outside the scope of Income Tax (see BIM22015). However, this will not apply if the spread bet is used for a commercial purpose such as a hedge where the guidance at BIM56880 should be followed.

steve@bicknells.net

What if you borrow more than £10,000 from your company?

Directors sometimes borrow money from their company, when this happens there are several tax issues:

CT600A S455 CTM61505 – loans not repaid with 9 months of year end are taxed at 32.5%

Broadly, where a close company (either directly or through an intermediary):

  • makes any loan to,
  • advances any money to, or
  • confers a benefit on,

an individual who is a participator (or an associate of a participator) in the close company, then the close company is due to pay tax under CTA10/S455. The exception to this (in the case of a loan or advance) is if the loan or advance was made in the ordinary course of the close company’s business and that business includes the lending of money (see CTM61520). S455 applies only if the company is a close company at the time the loan or advance is made.

Although the company is charged to tax under CTA10/S455 “as if it were an amount of CT…”, this does not mean a loan or advance is, by itself, a distribution of the company or income in the hands of the recipient.

As regards:

  • the tests for determining whether a company is a close company, see CTM60100 onwards,
  • the meaning of loan or advance, see CTM61535,
  • the definitions of participator and associate of a participator, see CTM60107 onwards,
  • the exclusion of certain loans to directors or employees, see CTM61540,
  • the meaning of ‘confers a benefit’, see CTM61580,
  • reciprocal arrangements, see CTM61550 to CTM61555,
  • extension of CTA10/S455 to loans by controlled companies, see CTM61700 to CTM61750

New tax procedure for Directors Loans (s 455) – Steve J Bicknell Tel 01202 025252

Benefit in Kind – If the loan was more than £10,000

If you’re a shareholder and director and you owe your company more than £10,000 (£5,000 in 2013 to 2014) at any time in the year, your company must:

You must report the loan on a personal Self Assessment tax return. You may have to pay tax on the loan at the official rate of interest (or pay interest to the company on the loan)

The Current Official Rate of Interest is 2.5% Beneficial loan arrangements – HMRC official rates – GOV.UK (www.gov.uk)

Loans over £10,000 need Shareholder Approval

A private company may make a loan to one of its directors, or give a guarantee or provide security in connection with a loan made by a third party to such a director. However, the transaction must first be approved by an ordinary resolution of the shareholders.

Exception for loans under £10,000 in aggregate

If the aggregate value of the loan and other related loans to a director does not exceed £10,000, there is no need to obtain shareholders’ approval (note that the £10,000 is an aggregate value, meaning that if a multiple of small loans to a director combine to a value over £10,000, it would require shareholder approval.)

Notes in the Accounts

Related party transactions are noted in the accounts, this even applies to Micro Entity Accounts.

steve@bicknells.net

Making Tax Digital ITSA Postponed !

Businesses will have an extra year to prepare for the digitalisation of Income Tax, HM Revenue and Customs (HMRC) has announced today.

Recognising the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic, and having listened to stakeholder feedback, the government will introduce Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) a year later than planned, in the tax year beginning in April 2024.

Businesses get more time to prepare for digital tax changes – GOV.UK (www.gov.uk)

MTD for Income Tax will now be mandated for businesses and landlords with a business income over £10,000 per annum in the tax year beginning in April 2024.

General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025, while the date other types of partnerships will be required to join will be confirmed in the future.

steve@bicknells.net

Are HMO’s within the scope of ATED?

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

You’ll need to complete an ATED return if your property:

  • is a dwelling
  • is in the UK
  • was valued at more than:
    • £2 million (for returns from 2013 to 2014 onwards)
    • £1 million (for returns from 2015 to 2016 onwards)
    • £500,000 (for returns from 2016 to 2017 onwards)
  • is owned completely or partly by a:
    • company
    • partnership where any of the partners is a company
    • ­collective investment scheme – for example a unit trust or an open ended investment vehicle

Returns must be submitted on or after 1 April in any chargeable period.

Some properties are not classed as dwellings. These include:

  • hotels
  • guest houses
  • boarding school accommodation
  • hospitals
  • student halls of residence
  • military accommodation
  • care homes
  • prisons

It is possible that dwellings contained within the same building can be treated as a single dwelling, and the aggregate value applied.  The details can be found in Section 117 FA 2013.

However, for a standard HMO property, where each of the dwellings is separately accessible, and none can be accessed privately via any of the other dwellings in the property, then none of the property values may need to be aggregated for the £500k threshold.

steve@bicknells.net