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Quit costs
The tax treatment of costs to obtain vacant possession.
Our client owns a commercial building which was occupied by four tenants. The building was old and required extensive repairs, but this would have proved very costly. After much deliberation, the decision was taken to demolish the property and rebuild it rather than repair the building. Consequently, we believe that the re-development costs should be treated as a capital expense.
The existing tenants were given notice to quit. However, due to various anomalies in their leases, this process entailed legal costs of £25,000 paid to solicitors and compensation costs of £50,000 paid to the outgoing tenants.
The client insists that these costs should be treated as revenue rather than capital in nature so that they would be deductible from the rental income. We have found decisions in tax cases can perhaps go either way.
Readers’ views on this would be much appreciated.
Query 19,351– Demolition Dan.
Happy anniversary?
When should use of the VAT flat rate scheme end?
My client joined the VAT flat-rate scheme from 1 March 2017. When she carried out the compulsory turnover check for the year ended 28 February 2019 she found that her total turnover (including VAT) exceeded £230,000. She therefore wrote to HMRC advising that she must leave the scheme.
HMRC has just replied saying:
‘I am writing to confirm that you have been withdrawn from the scheme with effect from 28 February 2019 … You will need to follow the normal VAT rules from the date of your removal…’
This seems to imply that she should start using normal VAT accounting from 1 March 2019; in other words, for her current March to May 2019 VAT period. However, my understanding from reading the regulations and Neil Warren’s article ‘24 hours’ (Taxation, 15 May 2014, page 11) is that a legislative oddity means that she can use the flat-rate scheme for one more quarter (March to May 2019). This would be extremely valuable to her.
HMRC’s Notice 733, paragraph 12.2, says the taxpayer must leave the scheme from the end of the VAT period containing their anniversary. Because she joined the scheme on 1 March 2017, surely her anniversary should be 1 March rather than 28 February as stated by HMRC.
This, in turn, implies that she should leave the scheme on 31 May because that is the end of the period containing her anniversary.
If I am correct, should I raise the issue with HMRC or can she simply submit her March to May VAT return using the flat-rate scheme rules?
I would be most grateful for assistance from readers.
Query 19,352– Flat Out.
Softly, softly
Is the cost of a work laptop deductible for income tax?
My client has agreed to take up employment for a computer software company. At the initial interview, the firm’s director explained to her that employees are expected to buy their own laptop computers. The firm will then install its software programs onto the employee’s laptop for their use when developing new products and providing the company’s services to its customers.
The client has asked whether the cost of the laptop can be deducted from her earnings for tax purposes.
It seems to me that she must have the laptop to carry out the duties of her employment, but I have a nagging doubt as to whether this is tax deductible. I have not previously acted for a client in such a situation so I should be grateful if Taxation readers can advise on whether there is any way that this cost can be claimed.
Is this scenario normal in the software industry and are there any other costs that might be claimed against tax for employees in this line of work?
Query 19,353– Tim.
Difficult division
Division of rental income between a husband and wife.
A couple of months ago, a husband and wife let out their townhouse which they own jointly and equally – they decided to move to the country. The husband is higher-rate taxpayer and wife pays tax at the basic rate. They have informed HMRC of the letting and have been sent self-assessment tax returns for 2018-19.
They have recently spoken to a ‘man down the pub’ – the tennis club in this case – who told them that there is an HMRC form they can complete to decide the proportion of the income that each will pay tax on.
Naturally, my clients want to show the wife as having 100% of the rental income. While I am aware of the form, will this not comprise income shifting or be treated as a settlement? The only reason they would sign is to pay less income tax. Further, after they moved out of the property they spent three months getting the place ready for the start of lettings. Can they claim the costs of the council tax, water rates and light and heat in the months they were renovating it?
I look forward to replies from Taxation readers.
Query 19,354– Bricked-Up.
