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New queries: 16 May 2024

13 May 2024
Issue: 4936 / Categories: Forum & Feedback

Unfair capital gains tax charge?

My client’s elderly mother went into a nursing home about four years ago. For a while, it looked as if she might be able to return to her home to live but after a brief attempt it became clear that this was not going to happen. Her children eventually decided that her house should be put on the market but unfortunately the property has not sold.

The 36-month period has now elapsed and therefore when the property is sold part of the gain will be exposed to CGT. This seems extremely unfair given that the property remains on the market. The cost of the property was low and so the gross gain could be substantial enough to trigger some CGT liability on a time apportioned basis.

Has any other reader seen a similar situation? Is there any possibility of HMRC agreeing some sort of concessionary treatment to reflect the fact that the property has not sold?

Query 20,331 – Hopeful.

Calculating taxable amount for transitional period.

I welcomed Simon Groom’s comprehensive two-part series on basis period reform: ‘The basics of basis period reform’ (Taxation, 11 April 2024 and 18 April 2024). I am having difficulty, getting my head around some parts of it, however, and I would like readers’ takes to help to get additional clarity.

Take ‘Illustration 2’ in part 2 of the series (‘Gareth’). The standard profit is £36,000. The transition part of the basis period is 1 October 2023 to 5 April 2024. Rather than take 6/12 x £54,000 (profit to 30 September 2024) which means waiting until later in 2024, could I calculate the profit now from 1 October 2023 to 5 April 2024? That would be the transition part (step 3). Deduct the £6,000 overlap from that. Add that result to the £36,000 (step 4). On to step 5: take the lower of step 3 and 4 and divide by 5.  Add that to the £36,000 and you get the taxable amount in 2023-24. There will be 4/5ths left to spread over the next four years. The profit for 2024-25 will simply start at 6 April 2024.

Am I being too simplistic? The whole exercise is another example of HMRC’s drive to make our lives complicated.

I’m interested to hearing other readers’ thoughts.

Query 20,332 – Lighthouse.

Should company be compulsorily VAT registered?

My client is a new company that started to trade on 1 March 2024 and only has one customer, a partly exempt business.

Turnover is £10,000 per month, which was negotiated on the basis that this is inclusive of any VAT that may be due. I had anticipated that my client would be registered for VAT on a compulsory basis with effect from 1 January 2025 in accordance with VATA 1994, Sch 1, para 5.

During April 2024 HMRC issued a letter stating that it will register my client for VAT with effect from 1 June 2024. The letter refers to VATA 1994, Sch 1, paras, 1(1)(a), 1A, 2, and 5. The letter also states that HMRC is aware that the trade carried on by my client had previously been carried on by its sole director and shareholder on a self-employed basis during the eight months to 29 February 2024.

HMRC appears to be suggesting that, if my client and its director are treated as a single taxable person on 30 April 2024, the income generated before 1 March 2024 must be included when that single taxable person monitors its turnover for the purposes of VATA 1994, Sch 1, para, 1(1)(a). Is HMRC correct?

Have Taxation readers come across this issue?

Query 20,333 – Bob.

Can VAT cost be minimised with separate entity?

Two of my clients are registered for VAT as a partnership – trading as florists – and they also own a buy-to-let flat, which has always been rented out on a short-term tenancy arrangement, ie the income is exempt from VAT.

They have now decided to rent out the flat through Airbnb to short term visitors, which is VATable income. They have suggested the following strategy:

  • The Airbnb income will be earned by a separate legal entity, a limited company that is also VAT-registered because it trades as a computer consultancy business.
  • The partnership will charge rent of £1,200 per month to the company – the market rate – which will still be exempt from VAT.
  • The annual income projected for the Airbnb activity is £18,000, so the company will pay output tax of £600 a year on the profit margin and also claim input tax on costs incurred. The figure of £600 is based on the margin of £18,000 less £1,200 x 12 months = £3,600 x 1/6 = £600.

Overall, VAT will be a very small cost on the Airbnb activity, which is helpful. Do readers think this strategy is flawed in any way?

Query 20,334 – Airman Alfie.

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Issue: 4936 / Categories: Forum & Feedback
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