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'Cleaning up'
A client and his wife own five separate flats which are rented out on shorthold tenancies. Four of them are furnished and one unfurnished. In an average year, after allowing for all operating costs and loan interest financing, the flats generate a profit. The terms of the shorthold tenancies insist that, at the completion of a tenancy, the flat is returned in good and clean condition.
'Cleaning up'
A client and his wife own five separate flats which are rented out on shorthold tenancies. Four of them are furnished and one unfurnished. In an average year, after allowing for all operating costs and loan interest financing, the flats generate a profit. The terms of the shorthold tenancies insist that, at the completion of a tenancy, the flat is returned in good and clean condition.
If tenants do this cleaning themselves, there is no issue. Equally, if a new tenant is coming in quickly, a professional cleaning company will be involved and its account is deductible with other operating expenses.
If there is a reasonable gap, the client (but not his wife) will do the cleaning himself plus other minor amounts of maintenance that need attention between tenancies. In that event an amount equivalent to buying the cost of these services from professionals will be withheld from the tenant's deposit and paid to the landlords. This can be, say, £250.
The landlord and his wife have other full-time unrelated occupations. What is the tax treatment of these 'reimbursed' sums? If they are to be included as income, is there any contra entry for the expense? These services are not billed by the landlord, but could be: he is not registered for VAT and has no other outside business interests apart from his Schedule E employment as mentioned.
(Query T16,160) - PMS.
The clients of 'PMS' rent out a property with the rental income being assessable under Schedule A. Where the husband carries out cleaning and repair work between tenancies, the outgoing tenant is billed for that work and so the first question is whether that expense is deductible against the rental income. A potential stumbling-block is that the work is being done by one of the owners and so a question arises as to whether the payment is simply a form of drawings.
However, I would argue that this is not the case, as part of the payment will be to reimburse the husband for cleaning materials, paint and the like. In addition, the husband is only a co-owner and so the payment is for additional work performed by him as compared to his wife.
'PMS' comments that no bill is raised by the husband, but presumably such documentation does have to be prepared to justify the cost to the outgoing tenants.
As the expense is deductible, is the income taxable? In my opinion the husband is taxable on the amount received, less any expenses incurred personally. I would include it as other income on his tax return rather than as a self-employment schedule due to the infrequent and uncertain nature of the income. - Hodgy.
The crux of this problem, I believe, hinges on the one word - deposit. Deposits paid by tenants to landlords will ordinarily be receipts of the Schedule A business. I guess there is still a good deal of inconsistency with the treatment of this money, but the pearl of wisdom offered in the Inland Revenue Tax Bulletin (Issue 25) should be a good starting point for 'PMS' to follow:
'Deposits should be recognised in accordance with generally accepted accounting practice, normally by being deferred and matched with the costs of providing the services or carrying out repairs. To the extent that a deposit taken from a tenant or licensee exceeds any relevant costs, and is subsequently refunded, we accept that it should be excluded from the receipts of the Schedule A business.'
'PMS' would then be advised to look at a not too dissimilar query, 'Maximising rental income', which featured in Taxation on 17 October 2002. In particular, whilst it may be generally accepted (by the Revenue) that payment to one spouse for additional duties is in order, the editor's note concerning the other implications should be heeded - not to mention further issues as borne out in other responses.
This leads to the matter of a contra entry. The payment(s) to the husband are for services rendered and are consequently liable to a tax charge; under Schedule D, Case VI, if all else fails. It is unlikely that the outgoing tenant would be amenable to a shortfall in the return of his deposit for costs not directly attributable to any of his shortcomings for his period of occupancy. So presumably, to make up the full deposit, the shortfall is made up from the particular tenant's final rental payments; relief accordingly claimed within the year's property accounts constituting the contra.
This does not appear to be particularly good tax planning - paying tax up front and getting the relief back sometime later. Perhaps 'PMS' should advise the husband and wife to keep it simple, bank the deposits and keep the money for what it was strictly intended. - Jim.
Extract from reply by 'N.K.':
In the Revenue's booklet IR150 Taxation of Rents, under paragraphs 512 to 519 on pages 101 to 103, it quite clearly explains, in this case, that in order to have the cleaning treated as trading income then, '514 - To run a separate trade of providing services (in addition to your Schedule A rental business), you need to show that what you offer goes well beyond the services normally provided by a landlord'.
The booklet then gives a number of examples, with paragraph 515 continuing 'The fact that you provide any or all of the services listed in the previous paragraph does not mean that your whole activity is a trade or that any separate earnings from those services arises from a trade. The receipts are part of your Schedule A rental business …'. This subject is also covered in the Revenue's Property Income Manual at paragraph 4300 entitled 'Providing services - Schedule A/trading?'.
