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What if my client ignores my advice on what is allowable for tax purposes

What if my client ignores my advice on what is...

I have a long standing client who runs a cleaning business from home. He can have anywhere between 5 and 15 employees at any one time. We have a licence agreement in place as the homeowner charges the company to use his premises but the client now wants to claim for substantial property costs (£6,000 to allow more vans on his drive, to build a porch so employees don't keep coming into the house) which to my mind completely fails the wholly, exlusively and necessary test. He is adamant that the accounts should include these costs as he and his wife feel they have little privacy with employees feeling they can turn up at any time to discuss issues relating to their employment. The client is willing to deal with the fallout if this occurs. I acknowledge I am the agent but I have yet to be in a position where a client ignores my advice so blatantly.  I don't want to walk away but my integrity is important to me. I'd be very grateful for some advice.

Bill

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17th Aug 2012 00:50

actually this raises a lot of interesting points

i am not totally against what your client is trying to do - wholly and exclusively does not preclude all the expenditure that it may appear to - if he is claiming for some of his house then that is proof thereof - if he is building a separate porch for business that may well be W&E in purpose. it would be interestimg to know what he is presently claiming for under the licence and how the house is divided up if at all. also is he a sole trader or ltd? maybe you could ask him if it would be in order to make a comment in the white scape on his tax return

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17th Aug 2012 02:21

I'm glad I'm not your clients neighbour

If it is annoying for the client and he has a financial interest in the arrival / departure of employees, then god help his neighbours. Another interesting (but off-topic) point is that the changes to the house will require planning permission, which given the business activity aspect should be declared and against which the clients neighbours can object.

From a tax perspective, I believe that there is an arguable case on the improvements as the expenditure does seem to be for a genuine business purpose, but your client is in danger of falling out of the frying pan and into the fire.

I would be concerned that the improvements (and possibly even the current usage) are effectively a change of use from purely domestic purposes to mixed commercial/domestic usage in which case the local council could attempt to charge (and possibly backdate) uniform business rates.

Equally, the council could simply object to the current and future mixed use of the site and put the mockers on the whole business.

I'm not saying any of this will happen, but it is a genuine risk.

Even if your client was able to convince HMRC that the changes to the property were wholly and exclusively then there is a potential for them to flag the property for a CGT investigation if ever the property is sold.

I would approach this from a different perspective.

1. Have your client make the necessary changes made to the property, but ensure that mixed use is maintained and enforced (along with photographs and other supporting documentation) to avoid a future CGT bill.

2. Revise the rental agreement between the director and the company to cover the non-exclusive business use of the extension and also the additional parking space. I would specify two rates, one for the internal use based upon pro-rated (possibly per square foot of useable space) costs and a separate charge for the parking. I would explain to the director how this would allow the costs of the extension to be recovered over a multi-year period.

3. I would place my concerns about wholly and exclusively in a formal letter advising the client of your genuine concerns that the matter could be subject to challenge by HMRC. I would also advise the client to seek separate legal advise about the mixed use of the site from a planning perspective.

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17th Aug 2012 10:08

Surely the costs are capital in that he is adding to his property rather than repairing/maintaining it and so will not be deductible in any event?

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17th Aug 2012 10:25

I agree with frustrated

sijolees wrote:

Surely the costs are capital in that he is adding to his property rather than repairing/maintaining it and so will not be deductible in any event?

Quite so.  The point of frustrated's suggestion is that the individual pays the (capital) cost personally, but then his business obtains tax relief over the years on an increased rental expense.

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17th Aug 2012 10:47

This is about making a personal capital investment for a return

Euan MacLennan wrote:

sijolees wrote:

Surely the costs are capital in that he is adding to his property rather than repairing/maintaining it and so will not be deductible in any event?

Quite so.  The point of frustrated's suggestion is that the individual pays the (capital) cost personally, but then his business obtains tax relief over the years on an increased rental expense.

And the client sees a return on capital through the increased rents being paid by the company to him / her personally. It's not ideal obviously and there are still potential challenges for HMRC, but they are mitigated. 

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17th Aug 2012 11:02

Rents received

Surely if the business pays him a commercial rent for the extra facility he must declare that on his personal Return as income - with very little in the way of deductions, as most of cost will be capital.  So any tax relief within the business of rent payments will be negated by property income 

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