Our client company is a close company whose principal activity is the production and marketing of computer and technological solutions.
The company owns the freehold of its business premises, which it is now proposing to distribute to its managing director (who is the company's sole shareholder) as a dividend in specie.
Our client company is a close company whose principal activity is the production and marketing of computer and technological solutions.
The company owns the freehold of its business premises, which it is now proposing to distribute to its managing director (who is the company's sole shareholder) as a dividend in specie.
The company has opted to tax for VAT purposes. Presumably the company will have to pay Customs and Excise VAT on the market value of the property. If this is in fact the case, will the value of the dividend for income tax purposes be the inclusive value or the VAT exclusive value?
(Query T16,100) - Techy.
I agree that output tax will be due on the 'gift' of the property because the grant of a major interest in land is a supply of goods (paragraph 4 of Schedule 4 to the VAT Act 1994). The rules in paragraph 5 of Schedule 4 create a supply where goods are disposed of as gifts. Paragraph 6 of Schedule 6 to the VAT Act 1994 then says that the value of the supply is what it would cost to buy goods identical in every respect including age and condition.
That, incidentally, illustrates an important principle, which it is so easy to neglect when advising. Everyone 'knows' that output VAT is due on the cost of a gift of goods. This is because a gift is usually of new items and the price paid for them is obviously evidence of what it would cost to buy them. However, that is not so in the case of a property for which the historic cost could be a fraction of the current value. It is often only in advising with the law in front of one that such a point becomes apparent.
In such a situation, the market value is bound to be a matter of subjective judgment for which an independent valuation on a conservative basis would seem appropriate. That will then raise the question of whether output tax is due at 17.5 per cent of the valuation or is calculated by applying the VAT fraction on the basis that it is tax inclusive and because the recipient would not pay any more because of not being able to recover the VAT. Unfortunately, paragraph 6 of Schedule 6 refers to the price payable by the person making the gift, not the one receiving it. Of course, that may provide some scope for argument about the market value of property to the client company, as opposed to buyers in general.
If any contractual arrangement needs to be put in writing, it might be sensible to provide for the company to be responsible for ongoing maintenance costs, so that it can recover the VAT incurred on them. - John Price.
For company law reasons, the dividend is likely to be expressed as a sum of money (probably equal to book value) 'to be satisfied by' the transfer of the freehold. For income tax purposes, the monetary sum will come within section 209(2)(a), Taxes Act 1988, and the difference between that and market value within section 209(4). The Revenue's Corporation Tax Manual does not address the VAT issue.
The same event will, however, be the event of a chargeable gains disposal and the Capital Gains Manual, at paragraph 14361, indicates that, in the event of a sale, the VAT element is disregarded. Inland Revenue Capital Taxes Office applies the same principle in assessing open market value for the purposes of section 160, Inheritance Tax Act 1984. It follows that any VAT chargeable by Customs can be left out of account for Schedule F purposes.
This conclusion can be tested by reference to the provisions of VAT Act 1994. Although the Revenue treats the monetary sum differently for Schedule F purposes, it allows an 'L' (i.e. gift) stamp duty exemption certificate to be used in the subsequent Land Registry transfer.
If Customs were minded to treat this as a monetary transaction, increased to market value under paragraph 1(1) of Schedule 6 to the VAT Act 1994, then section 19(2), VAT Act 1994 would be in point. Under this provision, 'value' brought into charge is 'such amount as, with the addition of the VAT chargeable, is equal to the consideration'.
If, in the alternative, they considered that the charge was triggered by paragraphs 9(1) and 5(1) of Schedule 4 to the VAT Act 1994, then section 19(3) would be in point. This provides that the land's 'value shall be taken to be such amount in money as, with the addition of the VAT chargeable, is equivalent to the consideration'.
On either basis, the market value is divorced from the VAT element. - JdeS.
Extract from reply by 'RNG':
For VAT purposes there will be a standard-rated supply of an opted building (there appears to be no possibility of the transfer of a going concern rules applying, the director acquiring presumably as a landlord). There is nothing to suggest that the director, or possibly his pension scheme, cannot opt to tax the building, register for VAT, charge VAT on the rent and recover the VAT on the acquisition price. A proper market value is required for the transfer.
