NOVEMBER Q&A
Claim VAT on a new house build?
Q. My wife and I have just bought a plot of land. We intend to build a new house on the land and sell it. Can we register for VAT and claim input tax on our building costs?
A. The answer is yes, but there are two important points here:
1. Jointly owned land is classed as a partnership for VAT purposes. Some advisors incorrectly think it is two sole traders owning 50% each. So the forms to complete when registering will be VAT1 and VAT2 plus HMRC’s property questionnaire VAT5L .
2. The sale of a dwelling built from bare land is zero-rated. It is possible that the sale will be the only taxable supply made by the partnership. This is not a problem for VAT registration purposes, the aim of the project is to make a profit so it is being made in the course or furtherance of a business.
The construction services provided by builders will be zero-rated, which extends to materials they provide as part of their work. So, any input tax you claim on a new build project will be restricted to professional fees (architects, surveyors, estate agents, etc.) and materials purchased without services, e.g. from a merchant.
Is a new election needed?
Q. My company purchased a property in April 2010 and rented it out to tenants until we sold it in June 2012. We opted to tax the property with HMRC because we were charged VAT on the purchase price and wanted to claim input tax. We also accounted for output tax on the rental income and selling proceeds. We intend to repurchase the same property next month and will again be charged VAT by the seller. Do we need to make a new option to tax election or is our 2010 election still valid?
A. The key issue is the length of time for which you did not hold any interest in the property. If this period exceeds six years, then your election is automatically revoked at the end of the six-year term and a new election is needed. Your election was automatically revoked in June 2018.
Should we have applied the reverse charge?
Q. Our business is VAT registered and partly exempt with about 30% of our sales being VAT’able. We have used a non EU based firm to do all of our bookkeeping and administration work for the last six years. We have never done a reverse charge calculation on our VAT returns because the supplier is based outside the EU but I have been led to understand this is incorrect. Do we have a VAT problem?
A. The answer is yes. The reverse charge procedures apply to services purchased from abroad and not just from countries in the EU. In most situations, the reverse charge does not affect the amount of VAT payable to HMRC because the output tax declared in Box 1 is the same as the input tax claimed in Box 4. But that is not the case here because your business is partly exempt. The services appear to relate to your overall business activities, i.e. residual input tax, which means you would recover 30% of the VAT declared in Box 1 as input tax under the standard method.
Further bad news is that you have made major errors on past VAT returns, which need to be corrected for the last four years under the error correction procedures.
Q. If my turnover falls, can my business leave Making Tax Digital for VAT?
A. The Making Tax Digital for VAT regulations specify that once a business is in MTD for VAT because its taxable turnover exceeds the VAT registration threshold, it must remain in the scheme, even if turnover subsequently falls below the threshold. MTD for VAT rules only cease to apply if a business qualifies for exemption, or if it deregisters from VAT.
Q. Is cloud accounting secure?
A. Yes, cloud accounting solutions are an extremely secure way of storing and sharing data. By having important data accessible across a range of platforms and not just in one place, the risk of losing it through a laptop or computer being stolen or broken is reduced. You can also ensure that your data is safe through password protection and encryption.
Even if a server goes down, thanks to automatic back-ups across a number of servers, you still won’t lose your data. And, because cloud accounting software allows you to share data without the use of USB sticks, your information is less likely to get lost.
Q. If you pay the full cost of fuel for private travel then you do not have to pay private fuel tax?
A. Including paying for fuel for journeys to and from work, paying for only part of the fuel does not reduce the tax paid.
Depending on your individual circumstances, it may be worth accepting fuel for private use. For example, for a petrol powered car emitting 130gm/km, so subject to a 30% charge, a basic rate taxpayer would pay £1,446 in fuel benefit tax for 2019/20. If the private fuel used costs £120 a month or less, they would be better off paying for their petrol.
A 40% taxpayer driving a car with emissions of 215gm/km, subject to a 37% scale rate would have a tax bill of £3,567 for 2019/20 and would have to be using petrol worth £297 a month to make it worthwhile accepting fuel for private use from the employer.
Q. How much can be gifted to individuals without incurring an immediate inheritance tax charge?
A. In theory, there is no limit to the value you may gift in this way, so a considerable amount could be passed on. If you don’t live for another seven years, the total of gifts made in excess of your nil-rate band (usually £325,000) will become taxable on a sliding scale provided you live for at least three years.
For example, if you give someone £500,000 in cash there is no inheritance tax payable upfront. However, if you were to die within 7 years of the gift, assuming that the nil-rate band at the time is £325,000 and doesn’t change in the following seven years, tax of up to £70,000 would be due. The donee is always responsible for any additional inheritance tax becoming paying in the estate of the donor, however HMRC will ultimately claim payment from the executors if the donee refuses to pay.
Once a gift has been made the money belongs to the recipient and so there will be no IHT due on any growth on it if you were to die within the 7 year period. However, if the money remains in your estate, IHT would be chargeable on any increase in its value.
