Archive for October, 2016

Claiming back pre-registration VAT

Wednesday, October 5th, 2016

The good news is you can reclaim VAT added to certain expenditure that was paid out prior to your business registration for VAT. HMRC’s instructions on this issue confirm:

There is a time limit for backdating claims for VAT paid before registration. From your date of registration, the time limit is: 4 years for goods you still have, or that were used to make other goods you still have, and 6 months for services. It may also be possible to improve matters by backdating registration in some cases – although you would need to take into account potential output tax liability on sales not previously liable to VAT.

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including: invoices and receipts, a description and purchase dates and information about how they relate to your business now.

You can’t reclaim VAT for:

  • anything that’s only for private use
  • goods and services your business uses to make VAT-exempt supplies
  • business entertainment costs
  • anything you’ve bought from other EU countries (you may be able to reclaim VAT charged under the electronic cross-border refund system)
  • goods sold to you under one of the VAT second-hand margin schemes

You will need to reduce your claim if goods or services have a mix of business and private use. There are also special rules for reclaiming VAT on single pieces of computer equipment, aircraft, ships and boats costing more than £50,000; or land and buildings costing £250,000 or more (before VAT).

Football agent loses tax appeal

Wednesday, October 5th, 2016

In a recent tax case, Jerome Anderson v HMRC, the First-Tier Tribunal denied a football agent relief for trading losses. The judges’ arguments centred on the issue of whether he was carrying on a trade, and if he was, was it on a commercial basis with a view to making profits?

There is already legislation in place that restricts any relief for trading losses if the trade is not commercial. The facts of the case were as follows:

  • Mr Anderson (Mr A) worked successfully as a football agent for many years, representing a number of big name players such as Dennis Bergkamp and Thierry Henry. 
  • In January 2009 Mr A paid £3 million to Bafana, a soccer academy in South Africa, through a scheme marketed by a Jersey company.
  • In return for the money paid he was able to choose three players from the academy, securing an interest for himself in any future transfer fees.
  • Bafana went into administration in 2011 and Mr A received no significant income.
  • Mr A claimed trading losses of £3 million in his 2008/09 tax return.

HMRC disallowed the losses.

Despite Mr A’s arguments that his activities under the Bafana scheme constituted a trade, and that he was more than a passive investor, the court agreed that the losses should be disallowed. Evidence pointed to a scheme to avoid tax rather than a genuine commercial undertaking.

Incorporating a buy to let property business

Tuesday, October 4th, 2016

Any buy to let landlord that presently claims a tax deduction for mortgage interest is likely to be adversely affected by changes in the tax rules from April 2017.

In previous blogs we have pointed out that from April 2017, finance charges (including mortgage interest) will gradually be disallowed as a deduction when computing a buy to let landlords tax bill. From 2020-21, all finance charges will be disallowed, and in their place, landlords will be able to claim a reduction in their tax due based on 20% of the finance costs disallowed.

This is a radical shift in the tax position of buy to let landlords especially those who are highly geared – they have borrowed heavily to expand their rental property portfolio.

Higher rate taxpayers will be denied full tax relief on their mortgage interest payments (they will be restricted to a basic rate deduction), and some landlords may find themselves paying tax at higher rates even though there may be no increase in their overall profitability.

What to do?

Initially, landlords should take advice to quantify the impact of these changes on their annual tax bills leading up to 2020-21.

Next, they should consider the effectiveness of incorporating their property business. Companies are not affected by these tax changes.

Not all buy to let landlords will benefit from incorporation. For some, the conversion and ongoing costs of incorporation will be more than any savings of additional income tax payable.

The change, from sole trader or partnership to a limited company, is not a process for the faint-hearted. It is something that must be planned carefully to avoid possible stamp duty and capital gains tax on-costs. Please contact us if you would like to consider the possible benefits of incorporation for your portfolio. The clock is ticking.