Advice - Land and property

Advice - Land and property

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A client arrived to us via 2 other accountants. Him & his wife have a building which they let out as office space to other business. They own the building. On receiving their last 2 years tax returns we note that the previous accountants had this income under Schedule A. Inland revenue's view is that its a business (and we tend to lean in that direction too) and they are self-employed. Is this is correct?
Janet Taylor

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By AnonymousUser
08th Jan 2002 21:42

Why don't the Revenue Read the Rules?
The deciding factor on whether the income is trading or rental income is whether there are sufficient services provided for it to be a trade. If there are insufficient services provided the income is assessed Schedule A whether it is a commercial property, a residential property or a roadside hoarding.

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By AnonymousUser
08th Jan 2002 22:47

Janet - husbands position may cause slight problems!

Janet,

Jim has given a succinct definition of what is schedule A and what is Schedule D 1 (trading income). this is quite important.

As to husband being non resident, the agent is required to deduct tax at the basic rate before remitting his (husband's) share of schedule A profits.

Husband will still be liable to UK tax but he may be able to claim UK personal allowances against the income.

Also, there may be tax payable by husband in in a foreign country but he may get tax credit for taxes paid in UK.

As to IR's view of income being a "business income", I would say they are wrong becasue the fact that the property is let to another business does not make the income becoming a business income.

Have you spoken to them by telephone? Try speaking to the Inspector personally and ask thenm to put it in writing possibly by fax. 31 January is approaching rapidly and you want to file the SAR before the due date.

Hope this helps.

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By AnonymousUser
09th Jan 2002 08:58

A big thank you to Jay and Jim
Thank you for your insight on this problem. The disscussion has now moved on with the Inland Revenue as to (1) whether the income and expense's should be entered on the Land and property page of the tax return or (2) on the self-assessment pages. There are two tax inspectors for (1) and two for (2). Which option would you go for?

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By neileg
09th Jan 2002 09:08

But...
The gist of the problem is still whether the income is schedule A or D. To reiterate the points made already, if the letting involves purely the provision of rooms used as offices, then it is Schedule A. If the arrangement involves the rooms plus other services such as receptionist, telephones, fax, secretarial services, etc. then this is a business.

If the income is 'A' then each person gets a share of the income and enters this on the tax return under land and property. If it is a business, then there appears to be a partnership, so there should be a partnership return and separate entries for share of partnership profits.

The number of tax inspectors is not really relevant!

(Appologies if my grasp of the SA return structure is slightly awry, but the principles are OK. My only experience of SA returns in practice are doing my own!)

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By AnonymousUser
08th Jan 2002 06:33

One item I forgot to mention
Both are not domiciled in the uk, the wife is resident and ordinarily resident in the uk and the husband is not resident and not ordinarily resident in the uk and since 6 April 1997 has only been in the UK for 84 days.

Accounts in the past have been prepared as a business with them both being sole traders in their own right with accounting dates 6 April to 5 April. The accounts information was then entered on the land and property form of the tax return. We understand that the inland revenue now want the account information entered on the self employed pages of the tax return as they state the property is a commercial property and hence a business.

Also rather than the husband and wife being two seperate sole traders would it not be better for them to form a partnership and register with the tax office as such?

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By AnonymousUser
07th Jan 2002 23:19

Schedule A is OK

The income is assessed under schedule A but the manner in which the profits and losses are computed is by using the trading principles.

This means that you begin by preparing accounts in accordance with generally accepted accountancy principles. Receipts and expenses of the rental business are recognized on the earnings/accrued basis.

Secondly, you apportion the profits/losses based on each partners respective shares in the property. If you want to change the shares for whatever reasons then you could use Inland Revenue Form 17 (unfortunately this is not online).

As to whether you should use strict fiscal year basis (April to April) or you want to use any other accounting period is depended on type of activity:

1) a property let by a trading or professional partnership (or a limited company) can use the partnerships/(company's) trading period;

2) If the property is used for trading purposes such as hotel or a guest house activity then again you use the businesses' accounting period.

I suspect the Inland Revenue clerk for simply saying that the profits/losses are to be computed as schedule A business.

Hope this helps.

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