.png)
.png)
Valuation conundrum
Deferred consideration for entrepreneurs’ relief
My client disposed of the entire share capital in her trading company on 30 April this year. All of the conditions for entrepreneurs’ relief (ER) were met. The consideration was £2m up front with an earnout based on the annual profits of the following three years. There is no minimum or maximum amount of deferred consideration specified in the contract. All payments are to be made in cash and there is no loan-note or share alternative.
My client understands that the initial disposal consideration will be the upfront cash plus the value of the right to receive further consideration. That will qualify for ER. When the deferred consideration is received that will be a separate disposal for capital gains tax purposes (with a base cost of the value brought into charge up-front) on which ER will not be available.
My client has suggested that she should put a very high value on the right to receive the deferred consideration. She knows that this will increase the amount which is taxable up front but is happy to accept this because it will increase the amount which will qualify for ER. I think it likely that, on a strict valuation basis, the true value of the earnout right might be significantly lower than the client’s suggestion.
Is this a problem? Would HMRC really enquire into the valuation of the right and seek to argue that is too high? That seems unlikely. And even if an enquiry did end up substituting a lower valuation there should be no question of penalties because the immediate tax liability had not been understated.
Do readers see problems in my preparing a return that includes a high valuation of the earnout right? Would I have a problem under the professional conduct in relation to taxation guidance?
Query 19,387– Mariner.
Rebasing
Applying for non-residency to sell land for development.
Our client is a disillusioned Brexit farmer (DBF) who is thinking of selling substantial land for development. He is considering non-residency remembering the old ‘three tax years away’ rule but was disillusioned to find this had increased to five years and that there are new rules for non-resident capital gains tax returns and rebasing. But when this was looked at in detail, it is difficult to confirm that rebasing applies here.
There are attractive UK tax alternatives available to DBF, such as rollover relief (thus replacement relief for inheritance tax), entrepreneurs’ relief and a 20% rate of capital gains tax. However, the lure of escaping overseas to a non-resident position with a vineyard looks attractive with all the Brexit fuss and worries over ‘wealth tax’.
Can readers explain if and how they think rebasing applies and how many years DBF must be non-resident and ideally lodged at his uncomplicated overseas vineyard?
Query 19,388– Farmer.
Style windfall
VAT treatment of unspent wardrobe budget.
It is common for stylists to receive a budget or float to purchase clothes for someone in the media to wear at a particular event or to dress a group in a film. Generally, this budget is separate from the stylist’s own fee, which is invoiced separately and subject to VAT.
We are concerned about the tax treatment of the wardrobe budgets. If, for example, a stylist receives a £5,000 budget and spends only £4,000, the extra £1,000 is meant to be returned. On this basis we do not include the £5,000 as the stylist’s income for either direct tax or VAT purposes. Similarly, we do not include the clothes purchased as a business expense.
The problem arises when the extra £1,000 is not returned. We understand this is a grey area in the industry and sometimes unspent budget is not given back to the organiser.
When requesting the budget, the stylist would not know whether there would be a surplus so they cannot make the decision on a case-by-case basis. They need to either treat all budgets as income and charge VAT (and claim all clothing as expenses and claim the VAT back) or they treat the budget as outside the scope of VAT. In our opinion, the requesting of a budget is not a taxable supply: the stylist is given this money to spend on behalf of someone else, it is not their money and it is not intended to be a reward to them for services rendered. If they do keep some money because no one asks for it back or requests a proper account of how it has been spent, can this change its nature and turn it into a taxable supply?
I look forward to readers’ replies.
Query 19,389– Fashion Icon.
Annexation
Elderly parents providing funds for a granny annexe.
My clients’ house has a large garden, and think they could obtain planning permission for another property.
Although they do not need medical or nursing care, the husband’s elderly parents need assistance and have suggested that they sell their house and use the funds to build a self-contained ‘granny annexe’ in the garden. The clients have asked for tax advice and I should be grateful for readers’ thoughts.
Could some main residence relief be lost and what about aspects such as the pre-owned assets tax and gifts with reservation of benefit? Is there any easy way of implementing this plan? I would be grateful for general advice here.
Query 19,390– Gramps.
Replies
Please email replies to taxation@lexisnexis.co.uk to arrive no later than 10am on the Monday, 11 days after the publication date. We pay £40 for a reply published in the magazine.
