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New queries

22 October 2019
Issue: 4717 / Categories: Forum & Feedback

Operation Overlap; Home and away; Seed of doubt; Associated companies

Operation Overlap

Final tax liability when no record of overlap relief

Following the death of her previous accountant, I have recently been appointed to act on behalf of a client who is self-employed and who has built up a successful business over the past 30 or so years. Her business accounts are still being prepared to a 30 April year end and I am in the process of preparing these and her tax return for 2018-19.

She has provided copies of her returns for the past six years, but I notice that there is no record of overlap relief brought forward. I was thinking of changing her accounting year end to 31 March, but because her profits are approaching six figures this would crystallise a substantial tax liability, especially if there is no overlap relief to reduce this.

I am now thinking of how I can best manage matters and reduce the impact of an eventual large liability on cessation – I think she is planning on retirement in about ten years’ time when she is in her mid-60s.

First, should I take the line that there is no figure for relief so none can be claimed or could I include an estimate. The problem with that would be that we have very little idea of her profit level 20 or more years ago.

My other thought was whether I could gradually extend her accounting date in stages in a managed process by a month or two each year towards 31 March by the time she retires. Is that approach feasible?

Another possibility that occurred to me was whether, when she retired, she could keep the business going for another year or so with, say, one client and a very small profit. Would either idea count as tax avoidance in today’s climate?

Perhaps I am worrying unduly, but I hope readers can advise.

Query 19,455– Consultant.


Home and away

Accounting for profits on overseas partnership.

I act for two UK resident individuals who are members of an overseas partnership. None of the partnership’s activities are carried out in the UK, the business accounts are prepared overseas and I am simply advised of my clients’ share of profits.

Not all jurisdictions calculate taxable profits on the same basis, so does that mean that I have to review the accounts for any expenditure that would be disallowable in the UK? Or do I just report the share of profits that is provided by the partnership?

I look forward to readers’ replies.

Query 19,456– Reporter.


Seed of doubt

Qualifying for the seed enterprise investment scheme

My client wants to invest in a renewable energy project development company (HoldCo). HoldCo will set up special purpose vehicles (SPVs) to lease land and then seek electricity grid permits and obtain permission to build and operate a wind farm or solar energy array. The SPV would be sold when the project was ready to be built. HoldCo would not carry out the construction work.

Is this activity a qualifying trade for the purposes of the seed enterprise investment scheme (SEIS)? I believe that specific trades are excluded, for example property development. ITA 2007, s 196 says that ‘“Property development” means the development of land:

  1. by a company which has, or at any time has had, an interest in the land, and
  2. with the sole or main object of realising a gain from the disposal of an interest in the land when developed.’

I believe this includes redevelopment. Also, for this purpose, ‘interest in land’ is defined as ‘any estate, interest or right in or over land, including any right affecting the use or disposition of land; or any right to obtain such an estate, interest or right from another which is conditional upon the other’s ability to grant it.’

My question is whether HoldCo is, in essence, trading land (or options on land use) or property development? The next owner would be responsible for the construction of the project. Is HoldCo simply creating a viable and valuable SPV?

Finally, would SEIS relief apply if the SPV or land was in, say, Germany?

Query 19,457– Self Starter.


Associated companies

Correcting VAT errors on management fees

I act for two associated companies that are both VAT registered and only make taxable sales.

Company A has been charging annual management fees to company B for some years – let’s say £100,000 plus VAT. All of the VAT has been correctly accounted for on both sides.

A recent change of structure has led to these charges being queried and the end result was that it was deemed that the charges should have been treated as employment income for the past two years because the owners of company A were also directors of company B.

All of the PAYE and National Insurance contributions have been settled and in the accounts of company A all of the management charge income has been reversed out.

My questions are as follows:

  • Should company A now issue a VAT credit note to company B for the £40,000 of VAT overcharged in the last two years and then repay this amount to company B with both companies adjusting their next VAT return?
  • Should both companies disclose the errors to HMRC on form VAT652; in other words as an error exceeding £10,000, the error correction limit?
  • Will interest and penalties apply to the input tax overclaimed by company B in this situation?

Readers’ thoughts are welcomed.

Query 19,458– The Juggler.

Issue: 4717 / Categories: Forum & Feedback
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