Are my costs Capital or Revenue expenditure? Reply

Stress business woman

It makes a big difference to your tax whether you can offset costs as revenue expenditure or remove costs because they are capital expenditure

HMRC published a guide on this in September 2016 and have circulated in in their Agent Alert Self Assessment Special January 2016.

https://www.gov.uk/government/publications/hmrc-capital-vs-revenue-expenditure-toolkit

The Toolkit is really useful and covers lots of problem areas:

  • Acquisition, improvement and alterations to assets – highly relevant to property investors
  • Legal and Professional – including how to handle unsuccessful property purchases – which are a capital cost – and Business Owner Training Costs
  • Finance Costs
  • IT Costs – including websites
  • Intangible assets – such as Goodwill

steve@bicknells.net

Should you lease or buy a van – which is better? 1

fotolia_249592[1]

Commercial Vehicles are tax efficient which ever option you choose and provided your employees agree to minimal private use they won’t have to pay any benefit in kind tax on using the vehicle.

But its important to make sure the vehicle you choose is actually a van and not classed as a car. For example double cab pick ups are extremely popular and it makes a big difference whether a double cab pick up is treated as Car or a Van for tax purposes, in summary:

  1. Benefit in Kind on Cars is linked to CO2 where as on a Van its Flat Rate (and could be zero if your private use is insignificant)
  2. Vans qualify for the Annual Investment Allowance, Cars have restricted Capital Allowances
  3. You can reclaim VAT on Vans but its much harder to reclaim VAT on cars

HMRC have some guidance in EIM23150….

Under this measure, a double cab pick-up that has a payload of 1 tonne (1,000kg) or more is accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight (care is needed when looking at manufacturers’ brochures as they sometimes define payload differently).

Under a separate agreement between Customs and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car (net payload reduced to 965 kg). Under this agreement, the weight of all other optional accessories is disregarded. HMRC has also adopted this treatment.

http://www.hmrc.gov.uk/manuals/eimanual/eim23150.htm

black large pickup

A double cab with a payload in excess of 1000kg can still be classified as a car if the taxman dealing with the case decides it is a car. You may have to justify a genuine business need for the vehicle.

Annual Investment Allowance

Since January 2016 the Annual Investment Allowance has been permanently set at £200,000, which means the first £200,000 you spend on assets, including Commercial Vehicles (vans), will be offset against your tax bill immediately. This applies to both the self employed and companies.

So if the buy your van, even if you get with a loan or on hire purchase, you should be able to make a big tax saving in the first year.

However, just remember that when you sell the vehicle there will be a balancing charge for tax, basically this means that the total tax offset will be the purchase price less residual value.

If you have already used up your AIA you will still be able to claim Capital Allowances.

If you lease the vehicle you can not claim AIA or Capital Allowances as you don’t own the vehicle.

VAT

If you buy the vehicle you will be entitled to full VAT refund, if you lease it you can reclaim the VAT on each Lease Payment (which slows down the recovery of VAT).

If you buy the Van when you later sell it you must charge VAT on the sale price.

Deposits

Cash flow might be a reason to choose a lease as its likely the deposit will be less than if you get a loan or HP.

Flexibility

If you need different vehicles for different staff at different times, leasing might be a good flexible option.

steve@bicknells.net

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The Tax Advantages of Commercial Fit Out Reply

Interior construction site

When you carryout out a refurbishment or Fit Out of your business premises you will be entitled to Capital Allowances.

Here is quick summary of the main types of allowance.

Business Premises Renovation Allowances

BPRA gives incentives to bring back into business use derelict or business properties that have been unused for at least one year. It gives an allowance of 100% for certain expenditure you incur when converting or renovating unused business premises in a disadvantaged area.

BPRA started on 11 April 2007 and ends on:

• 31 March 2017 for Corporation Tax
• 5 April 2017 for Income Tax

To qualify for BPRA, you must incur qualifying expenditure.

Qualifying expenditure is capital expenditure you incurred when you:

• convert a qualifying building into qualifying business premises
• renovate a qualifying building that is, or will be, a qualifying business premises
• repair qualifying business premises

Capital Allowances

Integral features

Integral features are:

• lifts, escalators and moving walkways
• space and water heating systems
• air-conditioning and air cooling systems
• hot and cold water systems (but not toilet and kitchen facilities)
• electrical systems, including lighting systems
• external solar shading

Fixtures

You can claim for fixtures, eg:

• fitted kitchens
• bathroom suites
• fire alarm and CCTV systems

You can claim if you rent or own the building, but only the person who bought the item can claim.

Annual Investment Allowance

The Allowance is set at up to £200,000 from January 2016

You can only claim AIA in the period you bought the item.

The date you bought it is:

• when you signed the contract, if payment is due within less than 4 months
• when payment’s due, if it’s due more than 4 months later

If you buy something under a hire purchase contract you can claim for the payments you haven’t made yet when you start using the item. You can’t claim on the interest payments.

If you don’t want to claim the full cost, eg you have low profits, you can claim part of the cost as AIA and part using writing down allowances. You can do this at any time as long as you still own the item.

If your business closes, you can’t claim AIA for items bought in the final accounting period.

Enhanced Capital Allowance

100% capital allowances can be obtained for expenditure on environmentally beneficial technology. This enables businesses to write off the whole capital cost against their profits in the year in which the expenditure is incurred and therefore to obtain valuable tax relief which can improve cashflow.

What doesn’t count as plant and machinery

You can’t claim capital allowances on:

• things you lease – you must own them
• buildings, including doors, gates, shutters, mains water and gas systems
• land and structures, eg bridges, roads, docks
• items used only for business entertainment, eg a yacht or karaoke machine

New Tenant – Lease Incentives

New Tenants may get incentives such as rent free periods or reverse premiums. The new accounting rules (FRS102) mean that these incentives are spread over the life of the lease not taken over the period to the first rent review. Spreading these savings out will mean that tenants get a tax advantage as the gain will be less at the beginning of their lease.

Fit Out Finance

Generally funding fit outs is an issue due to the nature of the security.

However there are lender who can provide funding, for example http://www.fitoutfinance.uk/

As the name suggests, Fit-Out Finance is dedicated to funding fit-outs of business premises, including:

• Head Office.
• Warehousing.
• Fast food outlets.
• Restaurants/retail premises.
• Showrooms.

Using a blend of hire purchase, lease, unsecured loan and other facilities where appropriate, we are able to fund not just the tangibles, but all manner of tertiary work, from survey through to painting and plumbing.

As previously noted HP and Loans are suitable for tax relief through Capital Allowances.

Here are a couple of examples of how funding can work.

Start Up Fast Food Outlet

Well researched & professional, our client was buying into a well-respected fast food franchise.

Their bank had supported the franchise purchase, but there was a further £75,000 required to fit the premises to franchisor specification.
With the customer’s background and a solid franchise, arranging leasing on equipment was fairly straight forward.

That left a £30,000 shortfall on less tangible works – as there were 2 owners in the business, we were able to secure Start-Up loans to fund the shortfall

A Warehouse

The client was a well established, profitable hirer of electrical equipment. Despite being profitable, the business was highly seasonal and therefore cashflow fluctuated wildly.
Most of their funding was done under their roof, being shared between the bank, and the bank’s own finance company, who handled their hire stock.
However, when they approached the finance company, they were confidently informed that racking and mezzanine floors couldn’t be financed; hence they ploughed on, pouring valuable cash into fixed assets.

They had spent over £100,000 on racking etc and were struggling with cashflow to complete the project.

The Funder was able to:
• Release the full value of the assets they had paid for.
• Provide ongoing further funding for a mixed bundle of assets, ranging from a mezzanine floor to bikes used to move around the facility efficiently.
• Provide a £35K term loan to cover intangible costs.

steve@bicknells.net

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10 ways to pay less Property Tax (Investors) 3

Mosaïque de logements

Here are my top 10 ways that property investors can save tax

1 Property Investment Companies

  • Restriction of Mortgage Interest Tax Relief – this doesn’t apply to companies
  • Corporation Tax Rates – falling to 18% by 2020
  • Capital Gains Tax – Capital Gains Tax indexation
  • Stamp Duty – lower on share sales
  • Inheritance Tax (IHT) and Potentially Exempt Transfers planning – better with shares

Further details in our blog https://stevejbicknell.com/2015/08/24/5-reasons-why-you-need-a-property-investment-company/

2 Commercial Property should be in a Pension Scheme

Self Invested Personal Pension (SIPP) Schemes and Small Self Administered Schemes (SSAS) can invest in commercial property, no tax on the rental income, no capital gains, you only pay tax when you draw your pension.

You also get tax relief on money paid into your Pension.

3 Claim tax deductible expenses

Claim allowable expenses

  • Mortgage or Loan Interest (but not capital)
  • Repairs and maintenance (but not improvements)
  • Decorating
  • Gardening
  • Cleaning
  • Travel costs to and from your properties for lettings or meetings
  • Advertising costs
  • Agents fees
  • Buildings and contents insurance
  • Ground Rent
  • Accountants Fees
  • Rent insurance (if you claim the income will need to be declared)
  • Legal fees relating to eviction

If the property is furnished claim for Wear & Tear, you can claim 10% of the rent each year

Claim for repair and advertising expenses incurred in getting the property ready for renting

4 Use a Property Development Company to Save VAT

Property Development is a trade, where as Property Investment isn’t – renting out a residential property is a VAT exempt supply.

If you are planning significant building work, setting up a Development Company or using a building contractor might save VAT.

Assuming you employ a builder…

The VAT Rules are in VAT Notice 708 Buildings & Construction

Your builder may be able to charge you VAT at the reduced rate of 5 per cent if you are converting premises into:

  • a ‘single household dwelling’
  • a different number of ‘single household dwellings’
  • a ‘multiple occupancy dwelling’, such as bed-sits, or
  • premises intended for use solely for a ‘relevant residential purpose’

As your builder will be VAT registered, they reclaim the VAT they are charged and then charge you VAT at 5%.

If your business is property rental and you do the work yourself, you can’t take advantage of the 5% rate.

If your Development Company is VAT registered you can reclaim all the VAT.

Get your existing business or your property development company to convert the property and then sell it to another company that you own (may be an SPV)  will be a  VAT Zero Rated transaction. The other company then carries on the rental business.

5 Principle Private Residence Relief and Lettings Relief

Principle Private Residence Relief (PPR) is useful relief that saves you capital gains tax (18% for basic rate tax payers and 28% for higher rates tax payers) on your main residence.

You may also qualify for lettings relief after you have moved out.

6 Give away your Property in Stages

As long as the home you give away is your main home, Capital Gains Tax won’t be payable.

However, if you give away a second home, Capital Gains Tax may be payable if the property has increased in value between when you first owned it and when you gave it away.

If you sell your second home and give the money to your children, the gift won’t be included in your estate for Inheritance Tax purposes, provided you live for 7 years after you make the gift.

It is possible to to gift property in stages.

Your solicitor will draw up the required documents to conveyance a percentage of the property and register the transactions with the Land Registry.

In order to calculate the capital gain you will need to know the acquisition cost and any reliefs such as PPR.

Giving away your property in stages could save you from having to pay capital gains tax.

7 Claim Capital Allowances and Claim Tax Relief on Integral Features

FA2008 introduced a new classification of integral features of a building or structure, expenditure on the provision or replacement of which qualifies for WDAs at the 10% special rate. The new classification applies to qualifying expenditure incurred on or after 1 April 2008 (CT) or 6 April 2008 (IT).

http://www.hmrc.gov.uk/manuals/camanual/CA22300.htm

The rules on integral features apply where a person carrying on a qualifying activity incurs expenditure on the provision or replacement of an integral feature for the purposes of that qualifying activity. Each of the following is an integral feature of a building or structure –

  1. an electrical system (including a lighting system),
  2. a cold water system,
  3. a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
  4. a lift, an escalator or a moving walkway,
  5. external solar shading

Only assets that are on the list are integral features for PMA purposes; if an asset is not one of those included in the list, the integral features rules are not in point.

However, Plant and Machinery includes….

other building fixtures, such as shop fittings, kitchen and bathroom fittings

Many businesses have never claimed capital allowances for these items.

8 Consider Joint Ownership

If you own property personally you could double up your tax free Capital Gains Tax Allowance if you switch to owning property jointly with your spouse.

9 Check if you qualify for relief from ATED

Most residential properties (dwellings) are owned directly by individuals. But in some cases a dwelling may be owned by a company, a partnership with a corporate member or other collective investment vehicle. In these circumstances the dwelling is said to be ‘enveloped’ because the ownership sits within a corporate ‘wrapper’ or ‘envelope’.

ATED is a tax payable by companies on high value residential property (a dwelling).

There are reliefs that might lead to you not having to pay any ATED. You can only claim these by completing and sending an ATED return.

A dwelling might get relief from ATED if it is:

  • let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
  • open to the public for at least 28 days per annum, if part of a property is occupied as a dwelling in connection with running the property as a commercial business open to the public, the whole property is treated as one dwelling and any relief will apply to the whole property
  • part of a property trading business and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
  • part of a property developers trade where the dwelling is acquired as part of a property development business the property was purchased with the intention to re-develop and sell it on and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
  • for the use of employees of the company, for the company’s commercial business and where the employee does not have an interest (directly or indirectly) in the company of more than 10%, the employee’s duties must not include services for any present or future occupation of the property by someone connected with the company, the relief is also available where a partner in a partnership does not have an interest of more than 10% in the partnership
  • a farmhouse, if it is occupied by a qualifying farm worker who farms the associated farmland, a former long-serving farm worker or their surviving spouse or civil partner
  • a dwelling acquired by a financial institution in the course of lending
  • owned by a provider of social housing

10 Take dividends this tax year

When you take dividends has never been more critical due to changes in the Summer Budget 2015, so if you have distributable reserves you might want to take more dividends this tax year, try our Dividend Calculator  to see how much difference it could make.

Dividend tax rates before April 2016

Tax band Effective dividend tax rate
Basic rate (20%) (and non-taxpayers) 0%
Higher rate (40%) 25%
Additional rate (45%) 30.56%

 

This will change from April 2016, see the table below

Dividend tax rates after April 2016

Tax band Effective dividend tax rate
Tax Free £5,000 0%
Basic Rate Tax Payers (20%) 7.5%
Higher Rate Tax Payers (40%) 32.5%
 Additional Rate Tax Payers (45%)  38.1%

 

The new rules are easier to follow, the 10% tax credit in the current rules is hard for most people to follow.

There is a Dividend Allowance factsheet which helps to explain how dividend tax will be calculated.

But be warned!

While these rates remain below the main rates of income tax, those who receive significant dividend income – for example due to very large shareholdings (typically more than £140,000) or as a result of receiving significant dividends through a closed company – will pay more.

So far we don’t know how much more!

steve@bicknells.net

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Is my website a fixed asset? 1

WWW Website

HMRC use the Analogy of a shop window….

The cost of a web site is analogous to that of a shop window. The cost of constructing the window is capital; the cost of changing the display from time to time is revenue. (BIM35870)

UITF Abstract 29

Set out 4 key areas of cost:

  1. Planning – P&L
  2. Application and infrastructure development – Tangible Fixed Asset
  3. Design costs – P&L
  4. Content costs – P&L

HMRC also have some useful information on software in CA23410

CAA01/S71

Computer software qualifies for PMAs if it is not already plant.

Computer software is not defined in the capital allowance legislation. You should treat computer programs of any type and data of any kind as computer software. Computer programs range from operating systems like Windows to games like Solitaire. There may be no physical asset because software is sometimes transferred by electronic means, for example it may be downloaded over the Internet. Software acquired that way is also plant.

A person may acquire a right to use or otherwise deal with computer software. If so, the right and the software to which it relates are plant. Treat the person as owning the plant while the person is entitled to the right.

 

Capital Allowances and the Annual Investment Allowance can be claimed against Plant including software.

steve@bicknells.net

Is it a Van or a Car? Reply

black large pickup

It makes a big difference whether a double cab pick up is treated as Car or a Van for tax purposes, in summary:

  1. Benefit in Kind on Cars is linked to CO2 where as on a Van its Flat Rate (and could be zero if your private use is insignificant)
  2. Vans qualify for the Annual Investment Allowance, Cars have restricted Capital Allowances
  3. You can reclaim VAT on Vans but its much harder to reclaim VAT on cars

HMRC have some guidance in EIM23150….

Under this measure, a double cab pick-up that has a payload of 1 tonne (1,000kg) or more is accepted as a van for benefits purposes. Payload means gross vehicle weight (or design weight) less unoccupied kerb weight (care is needed when looking at manufacturers’ brochures as they sometimes define payload differently).

Under a separate agreement between Customs and the Society of Motor Manufacturers and Traders (SMMT), a hard top consisting of metal, fibre glass or similar material, with or without windows, is accorded a generic weight of 45kg. Therefore the addition of a hard top to a double cab pick-up with an ex-works payload of 1,010 kg will convert the vehicle into a car (net payload reduced to 965 kg). Under this agreement, the weight of all other optional accessories is disregarded. HMRC has also adopted this treatment.

http://www.hmrc.gov.uk/manuals/eimanual/eim23150.htm

A double cab with a payload in excess of 1000kg can still be classified as a car if the taxman dealing with the case decides it is a car. You may have to justify a genuine business need for the vehicle.

steve@bicknells.net

 

Have you claimed capital allowances on your building? time is running out… 3

act now icon

FA2008 introduced a new classification of integral features of a building or structure, expenditure on the provision or replacement of which qualifies for WDAs at the 10% special rate. The new classification applies to qualifying expenditure incurred on or after 1 April 2008 (CT) or 6 April 2008 (IT).

http://www.hmrc.gov.uk/manuals/camanual/CA22300.htm

The rules on integral features apply where a person carrying on a qualifying activity incurs expenditure on the provision or replacement of an integral feature for the purposes of that qualifying activity. Each of the following is an integral feature of a building or structure –

  1. an electrical system (including a lighting system),
  2. a cold water system,
  3. a space or water heating system, a powered system of ventilation, air cooling or air purification, and any floor or ceiling comprised in such a system,
  4. a lift, an escalator or a moving walkway,
  5. external solar shading

Only assets that are on the list are integral features for PMA purposes; if an asset is not one of those included in the list, the integral features rules are not in point.

However, Plant and Machinery includes….

other building fixtures, such as shop fittings, kitchen and bathroom fittings

Many businesses have never claimed capital allowances for these items.

Paragraph 13 of Schedule 10 FA2012 introduced transitional provisions for making claims.

The provisions mean that where the current owner incurs expenditure on acquiring fixtures from a past owner before 1 (or 6) April 2014 and the past owner has not claimed allowances or pooled their expenditure in respect of a qualifying fixture,  the current owner may claim PMA on the part of the price the paid which is attributable to that fixture….. CA26470

It is possible for the buyer to use apportionment of the sale price (usually done by an RICS Surveyor) to determine the value of the fixtures. But this risks clawback of balancing charges for the seller.

A alternative option is to claim a Section 198 election which can be entered into within 2 years of the date of the property sale. It must be signed by the buyer and the seller and must identify the items covered. The elected value can be between £1 and the price paid, but makesure you undertand the implications of the price choosen.

As a Section 198 requires agreement you may wish to take legal advice Bonallack & Bishop Solicitors can help Jane.Bishop@Bishopslaw.com.

The Section 198 needs to made in writing to HMRC.

The following can’t claim a Section 198:

  • Property Traders
  • Developers
  • Pension Funds
  • Charities

But if you can claim you need to claim now as there are only a few weeks left until April 2014.

steve@bicknells.net