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Mitigating tax on incorporation.
Our client is a sole trader with an April year end. If the sole trader does nothing in the 2023-24 transition period, they would be taxed on the normal 12 months of profits to 30 April 2023 plus the 11 months of profits to 5 April 2024.
After deducting for overlap profits, any additional profits can be spread over five years starting with 2023-24. However, the sole trader is considering incorporating on 1 December 2023. Based on our understanding of the rules – as the sole trade is ceasing, the calculation of profits in 2023-24 follows the old closing year rules, which would mean profits from the normal 12 months to 30 April 2023 plus the seven months to 30 November 2023 are taxed (after overlap profits) but with no spreading. This, therefore, has a significant impact on the trader’s tax hit in the year of incorporation.
While we know that there are a number of other pros and cons of incorporation to consider, we wanted to see if other readers have had similar situations and if there was any way of mitigating the tax hit.
Query 20,247 – Sean.
VATable supply and SDLT for connected companies.
We act for a client who owns property in his own name and via three companies. He has indicated he is contemplating the following transactions.
Company A is contemplating acquiring two development plots from the client. It will hold the land as stock in trade with the intention of making first grants of major interests of the buildings that it plans to erect on the plots by effecting disposals to Companies B and C (associated companies under common ownership). Company C (which is a 100% subsidiary of Company B) plans to acquire three leaseholds to be granted by its parent, Company B. Company C also plans to acquire seven residential properties from the client. Can readers confirm that under the planned disposals and the undertaking of further development, only Company A will be making a vatable supply (albeit to a connected company)?
We would also appreciate readers’ comments on the SDLT position in respect of the acquisitions. They will form part of a series of connected acquisitions which we understand can complicate the SDLT calculations. The disposals being made by the client personally include more than seven residential units mixed with commercial property.
Query 20,248 – Stumped by Stamp.
Unclear residency tests.
Please could readers clarify the meaning of ‘significant break’ in the third automatic overseas test (TAOT)?
Third automatic overseas test
You work full-time overseas over the tax year, without any significant breaks and:
- you spend fewer than 91 days in the UK in the tax year;
- the number of days in the tax year on which you work for more than three hours in the UK is less than 31.
My client is self-employed and has been living (and paying tax) overseas since March this year, and came back to the UK for 33 consecutive days in the summer. He was aware of the maximum 91 days rule, but has only just realised that the words ‘significant break’ in the regulations means more than 31 days. I fear he has unintentionally fallen foul of this condition.
Significant break
You will have a significant break from overseas work if at least 31 days go by and not one of those days is a day on which you:
- work for more than three hours overseas, or
- would have worked for more than three hours overseas but you do not do so because you are on annual leave, sick leave or parenting leave.
The client wondered if the reference to ‘sick leave’ in the regulations would be of any help? He hoped that it might mean that if he was sick during his 33-day stay (which he was), he may be able to exclude those days from the total... but is he just clutching at straws? Am I correct that this mistake will mean he can no longer be classed as non-resident for this financial year?
Query 20,249 – Activity.
Will option to tax election be retrospective?
My question relates to the option to tax regulations and the date when it should take effect in my client’s situation:
- My client purchased the freehold of a derelict pub in July 2022 – he was not charged VAT by the seller.
- His plan is to convert the pub into offices and rent them out, charging VAT on the rent.
So far, my client has incurred some VAT on professional fees (eg architects and surveyors), and claimed this on his VAT returns as input tax, but he has not yet opted to tax the building with HMRC. I don’t see any problem with this because no income has been generated by the project (my client is waiting for planning approval so the building work can start).
My question is whether my client can opt to tax from a current date – submitting a VAT1614A to HMRC by email – or whether he needs to apply for a backdated election to July 2022. If the answer is July 2022, what is the procedure for asking HMRC’s permission now that its option to tax unit in Glasgow seems to have closed and everything is dealt with online?
Query 20,250 – Property Pete.
Queries and replies
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