I hope that somebody has come across this conundrum before and can put me out of my misery!
I have a company client that holds a commercial property under a 125 year lease. The gas service supplied to their premises is routed in error such that it supplies their property and two neighbouring commercial properties on the same meter, ie one meter for all three properties (one owned by my client and the other two nothing to do with my client). The properties are new and a head landlord ultimately owns all 3 properties with the other two being let on 15 year leases.
Before I commenced acting, the head landlord agreed verbally with my client that they should pay the gas bill (for the gas supplied to all three properties) in full and recharge an appropriate percentage to the other 2 tenants but there is no agreement as such between my client and the other 2 occupiers. The gas contract has therefore been arranged between the supplier and my client.
I have various reservations and maybe I am over-thinking it but the figures are substantial and material amounts are involved.
I am trying to ascertain the correct corporation tax and VAT treatment for (a) the payment of the gas bill and (b) the recharge to the other tenants, and getting mixed up I think/hope.
Corporation tax:
- Is the gas bill incurred in the course of carrying out a trade? Yes, one-third of it but not the other two-thirds. Does this mean that no tax-deduction is due for the two-thirds (which my client is essentially paying without having to pay it)?
- Is the income from the other two tenants subject to corporation tax despite the fact there is no contractual arrangement to pay it? I think it could be.
So could this mean that the income is taxable but the expense is not tax-deductible?
VAT:
1. Is VAT recoverable on the whole amount as the supply has been made to my client?
2. Is VAT not chargeable to the other two tenants as there is no contract between them and my client is not in the business of supplying gas to them anyway? Isn't the gas supplier is providing the service and not my client?
So could this mean VAT is recoverable but not chargeable?
I think I must be completely mixed up and all help would be gratefully received (especially as this is just one aspect of the problem!).
Thank you in advance
Replies (19)
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I think you are over thinking - certainly about the direct tax implications. Your client will get tax relief for the net cost he bears.
But your client should get something in black and white with the other two users, particularly about the basis of apportionment of the bills.
I would be talking to the landlord about re metering the property, there are various ramifications already re the accounts, for instance who underwrites if the other tenant fails to repay/goes bust, in addition there will be issues re taking readings to deal with tenant changes on the other units and billing to these dates and knowing these dates.
I suspect the developer set it up this was to reduce connection fees but beyond the short term it is hardly satisfactory.
You also have issues re repair and safety obligations post the meter, if there is a leak or issue after the meter who is responsible both financially and on a health and safety basis?
We have a number of these situations and where they subsist we, as landlords, step up to be the responsible party dealing with the supply/billing/safety-any other approach is just not acceptable.
Is this being over-complicated?
Dr Gas P&L x [clients attributable gas]
Dr VAT x
Cr Bank X
Dr Other Drs X [gross recharge]
Cr VAT x
Cr Gas P&L x [net recharge]
'Is this being over-complicated?'
No!
I'm sure most people here can post simple bookkeeping transactions.
The issue is beyond bookkeeping and accounting, and as DJKL outlines, it is more of a legal matter.
Newstarter appears to be answering the OP's 5th paragraph.
Another patronising reply on AWEB...must get myself a jumper. Forgot the !
They may well have been, but without quoting a specific point, it 'appears' to be just a general post that 'appears' to simplifying a matter that goes beyond bookkeeping entries.
*slow clapping* just for you. Is that more patronising? ;)
Is this being over-complicated?
Dr Gas P&L x [clients attributable gas]
Dr VAT x
Cr Bank XDr Other Drs X [gross recharge]
Cr VAT x
Cr Gas P&L x [net recharge]
It isn't being over-complicated but it is wrong.
You've debited the 'attributable' gas and then credited off the re-charge. If you're crediting the recharge then you should debit the total cost (leaving the attributable bit to remain at the end of the process).
In case the above isn't suitably patronising I'll add:
"good try though. I'm sure we all struggled with double entry when we first started too"
I suggest you read the journal more closely. The bank credit is going to be the full gas payment and once the credit recharge journal is entered the net debit to the P&L will be the 'client attributable gas' which is why it is in square brackets.
Good try though. Sorry to hear you struggled early on with double entry. Keep trying. You'll get there.
I suggest you read the journal more closely. The bank credit is going to be the full gas payment and once the credit recharge journal is entered the net debit to the P&L will be the 'client attributable gas' which is why it is in square brackets.
Good try though. Sorry to hear you struggled early on with double entry. Keep trying. You'll get there.
I suggest you practice your journal layouts. Your square brackets are meaningless, particularly as you have 'client attributable' in the first one and 'net recharge' in the second - so it is clear that this is narrative and not the end result (unless the second journal is erroneous - who would have thought two simple transactions would have caused you so much trouble).
So - assuming (which is all we can do, particularly as you haven't used the word "being" anywhere!) either you still have a creditor to B Gas for the remainder of the money, or you have debited the client attributable amount and then credited a recharge, or your journal doesn't balance.
It's good that you question explanations rather than simply accepting them as it will help you to learn quicker. If, however, you're using the square brackets as an excuse to hide an error then I'd warn you that when your managers and/or partners review your files they will most likely see through this type of behaviour.
why doesn't the landlord register to pay the bill, in full, then recharge an element to each tenant - this could be written into the rental/leasing contract?
That's exactly what should be happening. Either that or they get the meters sorted out. Why is the tenant acting as an agent for the landlord? All of these bookkeeping arguments could have been so easily avoided!
If the three units combined are over the usage limit for being classed as residential usage, but individually they would be under, then you will be paying too much VAT.
Not an issue, in itself, if everybody can recover the VAT, but if you are paying 20% VAT, rather than 5% VAT, then you are also paying climate change levy unnecessarily.
Get the landlord to sort it out!
Are the units all put to similar use? Or is the end one a commercial kitchen, pottery, or some other form of intensive user? How is the usage apportioned?
I wouldn't be happy with this arrangement myself.
Good point, we have one tenant on a site where we rebill electricity (not gas)which has vast fridge/freezer / cold store rooms fitted, their electric is nearly as much as all the other units combined notwithstanding they only account for circa 15% of the total floor area- we use sub meters to deal with these sorts of issues and gas sub meters are just as possible.
As a developer they are short sighted, we had a block of 27 flats with only one electric and one gas meter and a whole host of sub meters, fine(except for the work billing and the loss on vat re 20%/5% differential) when we owned the entire block and leased them individually, not so fine when we decided to sell them individually.
The changeover cost just over £100,000 to get them individually metered/supplied and notwithstanding the main gas supply pipe and in building pipes had been adequate in the past to serve all the flats they insisted (standards had changed since we converted the building to flats) that we had the outside pipe dug up and replaced and new interior distribution pipework was also needed.
The developer (like us) may live to rue their initial path of least resistance, it may on a partial sale come back to bite them.
Mr Awol and newstarter01...grow up both of you. Pathetic. If my kids behaved like you two i would knock their heads together.