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New queries: 15 August 2019

13 August 2019
Issue: 4708 / Categories: Forum & Feedback
Residential renovation; degrouping charge; personal redundancy; tax and trains 

Residential renovation

Occupation by a guardian and the VAT reduced rate.

We act for a company that owns a residential property which has been empty for some 12 years. However, within the grounds of the property, there is an annexe that has been occupied by a security guard on an informal tenancy agreement for no rent for about ten years. The agreement is that he guards the property against vandals and squatters.

The annexe is furnished, but the main house is not. Our clients are now in the process of signing contracts with a construction company to renovate the main house with a view of letting it out once the works are complete. VAT Notice 708: Buildings and construction at paragraph 8.3.3 states that one can ignore occupation by ‘guardians’ for reduced rate purposes.

Can Taxation readers confirm that, in this case, the reduced rate of 5% VAT will apply on the qualifying expenditure. Just to clarify matters further, the annexe is not being renovated at all.

Query 19,419 – Vatguard.

Degrouping charge

Will degrouping apply to a property-holding subsidiary?

We have a scenario where a property holding subsidiary – which is accepted to be non-trading – is to be demerged from a trading group. The demerger will take place by way of the capital reduction demerger route, being a scheme within TCGA 1992, Sch 5AA.

This property-owning subsidiary has received assets by way of inter-group transfers in the previous six years and therefore should, in theory, be liable for a degrouping charge.

Our research has shown that had the company been trading the substantial shareholding exemption would have applied to ensure that the degrouping charge did not in fact crystallise. However, the substantial shareholding exemption is not available in these particular circumstances.

Our query is whether the degrouping charge will apply in this case. In effect will it take precedence over any relief that would be available under TCGA 1992, s 139.

Further, if the degrouping charge does crystalise, is this a gain that could then be rolled over in the same way as any other gain? As we understand it, the rules changed in 2011, seemingly to prevent rollover relief applying in future, but we would be obliged if readers could clarify matters here.

Query 19,420 – Mervin.

Personal redundancy

Can a personal company make its director redundant?

My client has been trading through a personal service company for about 20 years. He provides information technology and related services to various companies and other customers. On my reviews of his contracts and the relationships with his clients, I have always been of the view that he does not fall within the IR35 rules and HMRC has never challenged this.

For the past year, my client’s company has had a contract with one major customer and invoices have been rendered in the usual way and paid. However, my client now understands that, from the extension of the off-payroll working rules to the private sector in April 2020, it is likely that the customer will deduct income tax and National Insurance from this income.

My client would like to continue working for the customer because it is well-paying. However, it seems that this will be as an employee and the payments to his wife for her assistance in the business – previously made from his company – will no longer be allowable. The company would therefore seem to have served its purposes and can be wound up next year.

The thought that occurs to me is whether the client could, in effect, make himself and his wife redundant and would there be any income tax or corporation tax advantages to this. For example, could the company pay them statutory redundancy pay and perhaps some kind of termination payment?

I should be grateful for Taxation readers’ views on this subject.

Query 19,421 – The Terminator.

Tax and trains

Tax treatment of the costs of installing a miniature railway.

My client operates a fun fair. As an added attraction, he is thinking of installing a small ‘ride on’ railway which will be able to take parents and children around the site. I understand that this will operate on a 7¼ inch track which he will be purchasing second hand along with a couple of steam engines and ‘sit astride’ wagons.

I have been wondering about the tax treatment of these purchases. Presumably the engines and wagons will be eligible for capital allowances as plant and machinery, but what about the track? Will this also be eligible for capital allowances even though it will be fixed to the land? The rails will be fixed to sleepers which will be positioned in stone ballast. I believe that the ballast will degrade over time and will need topping up; I assume that this will be a repair rather than a capital expense, but how is the original cost treated?

Finally, how should the labour costs of the railway installation be treated for tax purposes?

I hope that Taxation readers can help here.

Query 19,422 – Thomas.

Issue: 4708 / Categories: Forum & Feedback
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