Is capital treatment available?
My client owns shares in a private company – there has been a disagreement between the various shareholders and it has been agreed that his shares will be bought by the company via a purchase of own shares. I am satisfied that this will meet the benefit of the trade test and that, as the company will purchase all his shares, on completion the substantial reduction and no connection tests will be met. The problem on which I seek readers’ advice concerns the ownership conditions. There are 200 shares in issue. My client subscribed for 30 shares when the company was formed about 20 years ago and those shares clearly meet the five-year ownership test. But three years ago, another shareholder left the company and my client personally purchased 20 shares from him. So those shares do not meet the five-year condition. All the shares are of the same class.
Can capital treatment apply to the 30 shares acquired originally with the other 20 shares being treated as a distribution? Or does the test look at all the shares together, and if so, does this mean that because not all of the shares have been held for five years, capital treatment is denied for the entire holding? That seems harsh but the amounts involved are significant. I’ve not come across this situation before and any guidance that you can give me will be extremely helpful.
Query 20,611 – Split personality.
Confusion with reverse charge and end user issues
A client trades as a limited company and has a dilemma with the reverse charge rules for the construction industry and notification of end user status.
- The company is building a warehouse on land it owns, which will be rented out or sold when it has been completed. An option to tax election has been made with HMRC.
- It is Construction Industry Scheme- and VAT registered.
- The company has used three building contractors; two have charged VAT at 20% and issued tax invoices but the other contractor has not charged VAT, and said the reverse charge applies because my client has never notified its end user status in writing.
- My client has accepted the invoices from the other suppliers and claimed input tax on past returns, and carried out reverse charge calculations on invoices received from the supplier who has not charged VAT.
As I understand it, the reverse charge should apply to all services because my client has never notified its status as an end user to any party in writing, even though it is. Apparently, the two builders charging VAT asked a director of my client’s company if it was an end user at a site meeting and the director said ‘yes’.
My concern is that there is inconsistent VAT treatment on the builder invoices, which cannot be correct. What should my client do as far as past and future supplies are concerned?
Query 20,612 – Confused.
Pension double counting?
My client has cashed in a self-invested personal pension (SIPP) but he has, in the same year, made some relatively small pension contributions. The non-lump sum element of the SIPP is being paid under deduction of pay as you earn (PAYE).
When preparing a tax return for him, the pension income is treated as earnings. I had therefore expected that that income would be treated as part of his net relevant earnings for the purpose of computing the extent to which his pension contributions would qualify for tax relief. But the return software excludes it from the calculation.
Is that right? Can something be treated as earnings subject to PAYE and yet at the same time not be treated as part of net relevant earnings? That doesn’t seem right.
Query 20,613 – Muddy Waters.
No such thing as a free lunch?
My client company runs tours in several major cities in the South of England. These vary from three-day short breaks with hotel accommodation down to two-hour open-top bus tours round a particular part of a city. The company also offers some free tours, which it hopes will act as taster sessions for people to come back to book on a longer tour/break. These are typically walking tours of 30-45 mins with a guide. The guides are self-employed people engaged by the company on an ad hoc basis, as and when required. At the end, guides often ask for donations from those who have taken the tour. These are matters between the guide and the customers; the company does not get involved and the guide does not have to pass on the donations to the company.
Are there any tax risks here for the company? The guides will complete their own self-assessment returns and they will have to decide whether the donations are trading receipts. But could it be argued that the donations are in fact income for the company? The branding for the tours is all in the name of the company and the reason that free tours are put on is to advertise the company’s other activities. A steady trickle of paid bookings does result from people sampling the free tours, so they are an effective means of promoting the company’s business. If readers could offer me any advice on the corporation tax and VAT aspects of this, I would be very grateful.
Query 20,614 – Walker.
