Zero Rated – is a building an annexe used for a relevant charitable purpose?

A First-Tier Tribunal was held on 29 November 2018 between HMRC and Oholei Yosef Yitzchok Lubavitch Schools (“OYY Schools”) to determine if construction was zero rated or standard rated for VAT purposes.

Background

OYY runs a nursery and a school. The nursery had never made a profit and seeks donations from the community to cover any shortfalls. The parents of the children are charged a ‘contribution fee’ to cover running costs. However, no child is turned away due to lack of payment as the focus is on religious matters.

In 2013, it was decided to move OYY Schools to a newly acquired site. The existing residential building was to remain and have some internal works completed. The existing extension to the rear of the property was to be demolished and a new single-story area be constructed in the same location (the new structure).

The new structure is physically attached to the existing building by sharing a wall and consists of a large rectangular space that can be partitioned by a sliding/folding screen (like a school hall/gymnasium). There is no internal access between the existing building and the new structure. There is also an office which is used for charitable purposes.

The school would use the existing building and the nursery would use the new structure. Both the nursery and the school can operate independently of each other.

The existing structure and new structure each have their own entrance. The existing buildings entrance is at the front of the property and the new structures entrance is at the rear of the property.

Findings

For the new structure to be classed as zero rated, it is required to be an annexe that is intended to be used for a ‘relevant charitable purpose’ and is not in the course or furtherance of business. To determine this, the Tribunal addressed the following main requirements:

  • Is the new structure an extension or an annexe?

Simply because the new structure is physically attached to the existing structure does not mean that it is an extension rather than an annexe. The existence of an internal access to the new structure is a material factor in determining whether the work is an extension rather than an annexe.

The new structure is not sufficiently integrated to be considered an extension to the existing building and it is an annexe.

  • Can the new annexe function independently from the existing building?

The annexe has its own toilets, kitchen, storage and office spaces. It is connected to water and electricity and has its own separate boiler.

There is no access to the annexe internally. Each building has its own main access. Even though the existing building and annexe are on the same parcel of land, it does not alter the fact that the annexe can function independently from the existing building.

  • Was the intended charitable use of the annexe in the course or furtherance of a business?

Just because the provider has a charitable status does not automatically mean its operations cannot be classed as a business. The school and nursery are run on a non-profit basis. OYY Schools needs to finance its activities and does this through amounts paid by parents of children attending the school and nursery and through donations and grants. The Tribunal found these fees are set at a level designed to ensure OYY Schools covers its costs. Then donations are used to subsidise the fees. The Tribunal found the fees set would not allow the nursery to break even and if there were no other sources of income, the nursery would operate at a loss. The ability of the nursery to exist and to carry out its charitable purposes depended on receipt of donations and grants from other sources. The Tribunal found that the annexe was not used in the course or furtherance of a business.

Decision

The Tribunal ruled that the appeal by OYY Schools was allowed, and the construction of the annexe was zero rated for VAT purposes.

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please call 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.

HMRC has published further guidance on the VAT domestic reverse charge applying from 1 October 2019 to supplies of building and construction services.

The reverse charge affects businesses who supply specified services that also need to be reported under the construction industry scheme (CIS).

The new guidance has more detail and examples to help suppliers check whether their customers are end users or intermediaries. The reverse charge does not apply to customers who are end users, or if they are ‘intermediary suppliers’. The concept of intermediary suppliers means that if a number of connected businesses collaborate to purchase construction services, they are all treated as if they are end users and the reverse charge will not apply to their purchases. For this purpose, intermediary suppliers are VAT and CIS registered businesses connected or linked to end users, who:

  • share a relevant interest in the same land where the construction works are taking place;

and

  • belong to the same corporate group or undertaking.

The guidance suggests a practical way of dealing with the question of end-user status would be for businesses to include a statement in their terms and conditions to say they will assume their customer is an end user, unless they say they are not.

HMRC acknowledges that some businesses who have large numbers of active contracts with sub-contractors at a variety of sites may have difficulty establishing whether the reverse charge applies or not in the run-up to 1 October 2019. The guidance therefore states that where contractors can see that the reverse charge applies to more than 5% (by volume or value) of all contracts with one sub-contractor, they may apply the reverse charge to all contracts with that sub-contractor.

Transitional arrangements mean that normal VAT rules apply to invoices for supplies entered into customers’ accounting systems before 1 October 2019 and if payment is made on or before 31 December 2019. The reverse charge will apply in all cases where invoices are entered into systems on or after 1 October 2019, or payment is made on or after 1 January 2020.

The guidance covers situations in which businesses may become repayment traders as a result of the reverse charge removing the need to pay VAT on some of their sales.  It also details how best to move over to monthly returns should this be the case.

Examples are provided of how the reverse charge will apply to supplies of construction services made to certain sectors, such as utility companies and local authorities or other public bodies, including planning gain agreements.

Employment businesses who supply staff, and who are responsible for paying the temporary workers they supply, are not subject to the reverse charge.

The guidance can be found here and a presentation done by our partners Johnathan Main and Joe Sullivan can be found here.

Further Advice

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please on 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.

Payments on Account & HMRC Demands

The time to make your second 2018/19 payment on account for Self Assessment is becoming due on 31 July 2019, but what exactly is a payment on account (POA)? In most cases, a POA arises when an individual’s tax liability is more than £1,000 in a tax year and are due in equal instalments on 31st January and 31st July following the end of the previous tax year. Such instalments aren’t required where more than 80% of the tax due has been collected at source. In respect of these instalments, they both represent half of the total tax due for the respective year.

In the first year of Self Assessment a taxpayer is often required to pay tax on the following 31st January for year 1 and a 50% POA for year 2, with a second POA for year 2 on 31 July. This can affect cashflow and the tax for year 2 may well be higher or lower than year 1.

It is possible to apply to reduce the POA if a taxpayer reasonably believes the overall tax will be lower. This is acceptable to HMRC, but they will charge interest at 3.25% on any eventual shortfall if it arises.

HMRC generally issue statements to taxpayers prior to the payment deadline and so taxpayers should now start to receive relevant demands for their 31 July POA. However, technical issues have known to arise regarding taxpayers not receiving their demands. This can cause numerous problems for taxpayers, one being that they could possibly be liable to a large tax bill for the following January coupled with interest charges. To help mitigate this, taxpayers who aren’t sure whether they are due a tax liability, should contact their respective tax adviser. If individuals prepare their own tax returns, they should call HMRC on 0300 200 3310 or check their online tax account.

Trust Registration – The Latest Developments

We have all heard the saying “”Put not your trust in money but put your money in trust.”. Interestingly, this was never concerned with tax planning, but was directed at nineteenth century heiresses whose wealth would pass to a husband on marriage, unless suitably protected. Surprisingly, some of these archaic trusts are still in existence, and some of them should by now have been logged with the Trust Registration Service which was set up in 2017 as a result of the fourth Anti Money Laundering Directive. Even though most trusts with annual tax liabilities already had HMRC files since the trust register, which was set up in 2017, was not compatible with the previous HMRC records, those trusts were all obliged to re-register. The obligation applies to all formally created trusts unless they fall into certain exempt categories – the exemption usually being that it carries no liability for any tax other than minimal amounts of bank interest.

Data released by HMRC in February suggests that the registration requirement has already been missed by many trustees. Registration for existing trusts should have been made by January or March 2018, but by February 2019 only 85,000 trusts had registered – somewhat fewer than the 141,000 which filed self-assessment tax returns in previous years.

The key dates for registration are 5th October following the tax year when a capital gains tax or income tax liability first arises, and 31st January following the tax year in other cases. Failure to register can give rise to a penalty, starting at £100 and rising to £300 or more after six months. So, judging from the February trust statistics report, at least 56,000 trusts will already be in a penalty position, not to mention others which may have been caught by the new registration rules, but which had not previously been submitting annual returns. It seems probable that most professionally administered trusts will have been compliant, but understandably, many lay trustees, being aware that they have regularly filed self-assessment returns, may not have realised that further action was required on their part.

The position is set to become even worse. The fifth Anti Money Laundering Directive was passed by the EU in July 2018 and is set to pass into UK law in March 2020. This will bring ALL expressly created UK trusts (and some non-resident trusts) into registration, including those which generate no income or gains or where the income is paid to and declared by a beneficiary. It has been estimated that this might raise the number of trusts which SHOULD be registered from about 200,000 (of which less than half are complying) to around 2 million.

It is not uncommon for farming businesses to have a certain level of exposure to trusts. To take a completely fictitious example, we might see two brothers farming in partnership with:

  • Lower Farm owned by grandma’s 1942 marriage settlement, with the farm paying a rent to her which she declares it on her own tax return. The trustees both died decades ago and have not been replaced. No one has therefore registered it, nor has anyone needed to. The trust terminates in 2022.
  • Green Farm being held by grandpa’s discretionary settlement for his grandchildren, who are receiving irregular amounts whilst they are at university. This has a professional trustee and is already registered
  • Church Farm, which is held by the executors of uncle John.  The brothers have life interests, but no rent is paid by the partnership. On their death it is divided between their children. Everyone has forgotten this is in trust.
  • Eight pension and insurance policies taken out over the years and held in several different trust arrangements

At present, and quite correctly, only one trust is registered. By 2020 the number will rise to eleven. There is a strong possibility that some of these will be overlooked unless someone grasps the registration nettle, and even then, there will be problems in tracking down executors and trustees who may not have been seen for years or indeed, who may no longer be alive.

Whilst March 2020 seems some distance away, it is not too soon to start putting steps in hand to ensure compliance and avoid penalties. HMRC have indicated that the deadline for existing trusts requiring registration under the fifth Directive will be extended to 31st March 2021 (new ones will be working to a 30-day deadline), but time flies and this should definitely be added to the list of “Jobs for a rainy day”.

If you have any queries or you wish to discuss this further, please do not hesitate to contact Sue Buckingham or Alison Houghton.

Entertainment expenses – what are the tax implications?

In general, there are two separate headings under which entertainment expenses can fall, namely ‘staff entertainment’ and ‘business entertainment’, with differing tax implications for each.

Staff entertainment:

Staff entertainment is an allowable expense for corporation tax purposes provided that it is wholly and exclusively for the purposes of the trade. Common examples of this are meals, parties or other entertainment undertaken to boost staff morale. The term ‘staff’ generally tends to refer to employees who are on the business’ payroll and being paid a salary, but also extends to cover retired members of staff and the partners of existing and past employees. However, this does not extend to staff of associated companies or other companies in the same group, and any cost incurred on these will not be classed an allowable expense. Similarly, sole traders and partners in a partnership or LLP are not classed as an employee due to having no legal separation from themselves and the business, meaning tax relief also cannot be claimed in this case.

Staff entertainment can also qualify as a tax-free benefit for employees, subject to the following conditions:

  • The staff entertainment must be an annual event;
  • Open to all employees; and
  • Must cost no more than £150 per head per year.

An example of this would be an annual Christmas party, in which all of the employees are invited and the total cost per head would be no more than £150 which is inclusive of all expenses related to the event (such as food, drink, accommodation and travel) plus VAT. There is not a limit to the amount of staff entertainment events that can be held per year, however, the aggregate total cost per head must remain at no more than £150 for all of the events to claim tax relief. If any of the above three conditions are not satisfied, then the whole cost of the entertainment will become taxable on the employee as a benefit in kind. This can occur if the event is not annual, if some employees are excluded and if the total cost per head is greater than £150.

With regards to staff entertainment, there is also potential for VAT registered companies to reclaim any VAT paid on such costs. For companies registered under the flat rate scheme, no VAT can be reclaimed. However, for those registered under the Standard rate scheme, VAT on the costs of staff entertainment can be reclaimed.

Business entertainment:

Business entertainment, and any incidental costs of such,  on the other hand, is not an allowable expense for corporation tax purposes and unlike staff entertainment, VAT registered companies cannot reclaim any VAT paid on the costs of business entertainment. Business entertainment generally refers to the cost of entertaining clients, potential clients, suppliers or any other person who is not classed as an ‘employee’ of the business. This therefore means that when calculating the profit on which corporation tax must be paid, any business entertainment expenses must be added back to arrive at the taxable profit.

There are often times when staff entertainment and business entertainment could appear to coincide.

For example, if an event is held at which both staff and customers attend, the primary purpose of the event must be considered. If the event is held for the purpose of entertaining the customers, this would be classed as business entertainment and all related costs would be disallowable for tax purposes, and any VAT could not be reclaimed. However, if the event is held for the purpose of entertaining the staff, this would be classed as staff entertainment and any related costs to the extent of entertaining the staff, but not entertaining the customers, would be allowable expenditure for tax purposes. In this instance, the VAT can also be reclaimed to the extent of the costs related to staff entertainment; so, at an event held for staff entertainment purposes and with total attendees of 2 staff members and 2 customers, 50% of VAT could be reclaimed.

There is also the question of traveling costs which have been incurred in relation to business entertainment. These costs are incidental to the provision of business entertaining and therefore are not allowable expenses.

If you have any queries or you wish to discuss this further, please do not hesitate to contact Charlotte Dugan.

UK Residents with UK Residential Property Disposals – New Capital Gains Tax (CGT) rules from April 2020

From April 2020 all UK residents must report disposals of UK residential properties to HM Revenue and Customs and also make a payment on account for the CGT due, within 30 days of completion.

The changes do not apply where the gain made is not chargeable to CGT such as where the property has been the individuals only/main residence for the entire period of ownership and therefore covered by the principle private residence relief.  The rules also only apply to residential property currently.

The new rules being brought in are therefore going to mainly affect UK residents with second homes or landlords looking to sell their residential property lets.

Within 30 days of completion UK residents must

  • Calculate the gain made on the property (using estimates if necessary)
  • Report the gain to HM Revenue and Customs
  • Make a payment of CGT to HMRC

These new rules along with the changes to lettings relief and reduction of the final period of principle private residence relief all coincide with each other meaning that a disposal of UK residential properties could mean a higher tax bill from April 2020.

If you are thinking of selling a chargeable property you may wish to consider accelerating the sale to give additional time to pay the CGT.   

Any CGT payable on a property that is sold on or before 5 April 2020 will be due for payment no later than 31 January 2021 however, where a property is sold on or after 6 April 2020 any CGT payable will be due no later than 30 days after completion.

If you have any queries or you wish to discuss this further, please do not hesitate to contact Nicola Wignall via email at nicola.wignall@mooreandsmalley.co.uk

VAT Planning ahead of Land and Property Developments

A recent Upper Tribunal case between The Glasgow School of Art v HMRC highlighted the need to review VAT implications before renovating or developing a building and/or land.

The Background

The school was undertaking a project of the partial demolition, reconstruction and refurbishment of a building (Assembly Building) and the construction of a new building (Reid Building). The project was to be undertaken at the same time and the finished structure would be the Reid Building wrapping around and above the Assembly Building. There would be one wall of the Reid Building that would rest on the Assembly Building.

The Assembly Building was designed as a Students Union with bar and club (a taxable business). The Reid is managed by the School and serves several art school functions (a charity with Exempt supplies).

In order to receive funding, there had to be a ‘physical and useable link between the Assembly Building and the Reid Building.’ The design was therefore amended to include a single door connecting the two buildings.

VAT Implications

The Glasgow School of Art believed that the two buildings are separate and capable of being and were operated independently. In practical terms, there is no access between them as the single door is not used. They had different appearance, functions and opening times and a separate occupation. The school wanted and obtained two separate premises with different purposes.

The school put forward that all the Input Tax relating to the VAT incurred on costs relating to the Assembly Building should be claimed.

Appeal Decision

HMRC, the First Tier Tribunal and the Upper Tribunal determined that the builds are classed as one building and the construction was a single supply for VAT purposes. The reasons including:

  • a single price was charged by the construction company under a single contract
  • the funding was required for the project as a whole
  • the planning application was for both buildings
  • there has always been a physical link (internal door)
  • the whole construction was viewed as a single project
  • the site was repeatedly described as ‘the Reid Building’
  • there is no evidence that the Reid Building could have been constructed without the Assembly Building.

Although the school wanted and obtained two separate premises with different functions, this does not mean that there are two separate supplies for VAT purposes. As the building related to both Taxable and Exempt supplies, the full amount of Input Tax relating to The Assembly building could not be claimed.

Further Advice

A different approach to the build before construction could have changed the number of supplies that were being made and therefore increase the amount of Input Tax that could have been claimed.

If you would like to discuss this article in more detail or you would like to speak with a member of our team, please on 01772 821021 to be put in contact with a member of our Specialist VAT Advisers team.

Tax services for commercial property lawyers

Construction and real estate is one of the largest sectors in the UK, the construction industry is also one of the most complex; there is a maze of regulations, uncertainties and risks to deal with.

Our specialist tax advisers truly understand the nature of the construction industry and the challenges faced by business owners in the sector to get it right, and reduce the risk of an investigation by HMRC.

We work with a wide range of clients in the construction sector – including commercial and residential developers, contractors, sub-contractors, civil engineers, and architects – guiding a business from start-up, through growth strategies and surviving a changing economy all the way to exit planning.

Our tax specialists are well placed to work with commercial property lawyers and our fact sheet sets out the specialist areas where our expertise can add value to the work done for clients.

An overview of capital allowances

In our latest video David Hackett, Tax Director and Kelly Quail, Corporate Tax Senior Manager, discuss capital allowances. In the video they address the following questions:

1. What are capital allowances?

2. How can capital allowances benefit business owners?

3. What is the annual investment allowance and what are the limits?

4. What allowances are available within buildings? E.g. When companies are building property or are acquiring commercial property.

5. What other capital allowances can businesses make use of?

6. Can you claim more than one allowance for the same expenditure?

New rules to affect national insurance for termination payments

After being postponed for several years, the government have finally taken the decision to introduce new rules affecting national insurance contributions for termination payments. 

This will affect your business if from 6 April 2020 a termination payment is made to an employee.  The new rules bring national insurance into line with the tax treatment by introducing a new 13.8% class 1A employer national insurance charge. At the same time, new rules are being introduced for sporting testimonials.

Termination Awards and Payments in Lieu of Notice (PILONs)

By way of background, it is worth remembering that from 6 April 2018 the government changed the income tax rules on Payments in Lieu of Notice (PILONs).  Previously, a PILON was treated in the same way as other termination payments, which meant that they could be fully or partly covered by the £30,000 exemption. From 6 April 2018, the whole amount of all PILONS are taxable and subject to employee’s and employer’s NIC.

Other types of termination pay, such as redundancy payments, can still benefit from the £30,000 income tax exemption in certain cases. Income tax is then payable on the excess. Previously, national insurance was not payable on these amounts, but from 6 April 2020, Class 1A employer’s national insurance of 13.8% will be payable on the same amount as is charged to income tax. Employees will not be charged, however.

Care is still required as to whether the £30,000 exemption applies to other termination payments. It doesn’t by any means cover all payments, so please let us know if you are considering making such a payment.

Sporting Testimonials

The new rules applying from 6 April 2020 will create an employer’s national insurance charge of 13.8% on any part of a non-contractual or non-customary testimonial payment that exceeds the £100,000 threshold.