Rental Property

Rental Property

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Hi All,

I am hoping for a bit of guidance as I have just been approached by a client who has registered a Limited company with the following business activities:

Primary - Other letting & operating of own or lease real estate

Other - Accounting/audit services

The client bought a property in 2015 and has been renovating it, ready to be let out. At the same time the only director has been working through a recruitment company on a short contract doing accountancy work. The fees for the accountancy work has been paid gross into the clients business account and they have been using this revenue to pay for the refurb of the property.

My question are:

1.Can the expenses of the property refurb be offset against the income received from the short accountancy contract? Or, should the income, despite being paid into the business account, actually be classed as employment income and therefore be reported on the directors personal tax return?

2. The company year end is 30th June 2016. So far no rental income has been received only expenses. If the income from the short contract can't be used to offset these, the losses generated will carry forward to next years profits, is that right?

3. If the client changed their year end to 31st March 2017 and produced a long set of accounts, what factors would need to be considered? What would be the pros and cons of doing this?

Thank you in advance for your help.

 

 

Replies (14)

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By stratty
26th Sep 2016 15:26

Who owns the property? Is it personally held by the director or does the company own it?

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Replying to stratty:
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By Miss Money Poppins
26th Sep 2016 15:37

The company is the legal owner of the property but the Director paid for it. The Director has set the company up with 1 ordinary share being equal to the purchase price of the property...

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Replying to Miss Money Poppins:
paddle steamer
By DJKL
26th Sep 2016 15:57

Miss Money Poppins wrote:

The company is the legal owner of the property but the Director paid for it. The Director has set the company up with 1 ordinary share being equal to the purchase price of the property...

Why would they do that (create massive share premium account)? Why not create director's loan to enable Director to withdraw funds if needed?

You need to consider first if the property refurb by the company is capital or revenue expenditure and treat accordingly.

You next need to consider how the company can offset rental losses (if there are rental losses) against trading profits? It usually cannot do this. However Non Trade Loan Relationship Debits may be useful, if there are any. Did company acquire property with any borrowing?

If director taking funds from company what are these, salary/dividends?

If refurbishment of property is revenue would company still have enough reserves to pay dividends?

Is this a PSC?

If client has structured as you suggest you really have to ask him why? Did he seek advice?

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Replying to DJKL:
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By Miss Money Poppins
26th Sep 2016 16:17

I have only just discovered the structure by looking on Companies House. The Director has accountancy experience and I think they have just gone off and created this company without any third party advice or thinking it through. Can the structure be amended now? DLA would have been my first choice for the reason you state.

The expenditure falls under both categories so I would need to separate that accordingly.

I didn't think that the rental losses in this period (generated by expenses in the absence of any rental income) could be offset against the income received from the recruitment agency.

The Director bought the property outright.

At the moment the Director is not taking funds from the company. They have some property personally that they rent out which they earn an income from. These properties are dealt with on their personal tax return.

Yes, a PSC..

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By stratty
26th Sep 2016 15:49

My limited understanding on this is that the differing traders should effectively be ring fenced and while forming part of the same accounts dealt with separately.

Not something I have a lot of experience with so get a second opinion on that.

You will also need to establish if the property renovations are capital or revenue before considering the overall position for rental income etc.

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Euan's picture
By Euan MacLennan
26th Sep 2016 16:25

At the same time the only director has been working through a recruitment company on a short contract doing accountancy work. The fees for the accountancy work has been paid gross ...

Is it the director who has the contract for the accountancy work or the company? If it is the director and he has been paid "gross", it looks like a self-employment to be reported on his personal tax return and nothing to do with the company other than if he has paid the money into the company bank account, his loan to the company will have increased. I don't understand why you think it might be employment income paid under PAYE.

On the other hand, if it is the company which has contracted for the accountancy work, you need to consider if the director has been providing personal services to the end-client and hence, if IR35 applies.

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Replying to Euan MacLennan:
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By Miss Money Poppins
26th Sep 2016 17:01

I didn't mean to say employment income, I was referring to the income being from self employment...

The Director only contracted for 6months. They do not envisage that this arrangement will happen again. I have not yet asked if the contract was in the directors name personally or that of the company, I will find out. I know that sales invoices for this were not raised.

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By Tim Vane
26th Sep 2016 18:28

Well, you seem to now be presenting completely different facts to those initially outlined, in which you stated that you had a company with multiple business activities, and now you are stating you have a director of a property investment company who is also self-employed.

Frankly, it sounds like you are just thrashing around in the dark hoping not to bump against the furniture.

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Replying to Tim Vane:
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By Miss Money Poppins
26th Sep 2016 18:45

That is why I am here, seeking guidance and advice in a scenario I don't have any experience in just yet!

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Replying to Miss Money Poppins:
Stepurhan
By stepurhan
27th Sep 2016 09:42

Miss Money Poppins wrote:

That is why I am here, seeking guidance and advice in a scenario I don't have any experience in just yet!

The problem is that you keep presenting slightly different scenarios. It's impossible to give guidance on an ever-changing scenario.

So, if you really want to go ahead working with this person, pin down the full facts and come back if you are still unclear. Alternatively, as already suggested, just accept that this is beyond your abilities (there is no shame in that. We can't all be experts in everything) and turn the work down.

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Replying to stepurhan:
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By Miss Money Poppins
27th Sep 2016 10:18

Fair comment. This is the first time I have posted a question. I appreciate I need to be clearer in the first instance in order to get an appropriate response. I will take a look at all the key points and either repost clearer or like you say just accept its not a job for me.

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By Comptable
26th Sep 2016 20:36

As you have "just been approached" by this person it seems that they may not yet be a client.
I suggest that they would be best advised to go and find an accountant who can help them out of the huge mess that they seem to be in.

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By pauljohnston
28th Sep 2016 11:26

I would suggest a different route. We know nothing of your capabilities and other posters have been hard on you. The advice to find an accountant will or could mean that you loose business. I suggest you find an accountant with whom you can work and take the problem to him and in return you ask him to give the poortion of the work you feel happy with.

If you were near me I would offer this joint arrangement.

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Replying to pauljohnston:
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By Miss Money Poppins
28th Sep 2016 15:28

Thank you kindly for your suggestion, I also appreciate the gesture that you would of offered me support if we were nearer.

I have an accountant that is happy to form this arrangement and I sought some advice from him yesterday after feeling from the comments here that I was slightly out of my depth! This proved really useful, and I am more capable than I though after all. He is going to support me with this particular client so I can get the necessary experience in this slightly unusual scenario.

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