Licencing contract

Licencing contract

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Working from a dedicated office room but at home.

To all tax planners.

Introduction:

I have written this question before but without reply.  I have now formulated my question somewhat differently in the hope that I get further consideration.

Current:

It is current because there is now a proliferation of people running their businesses from home.

Problem:

HMRC are relying  on ‘old’ EIM legislation/P11DX dispensations pre 2009 and not reflecting current commercial practice by seeking to disallow rental charges for landline,  broadband and smartphones their grounds being:

  • These are personal contracts between the proprieter and providers.
  • Personal contracts preceeded the life of the limited company?
  • Because these are personal contracts incidental private use means the whole cost must be disallowed.

Body of my question: Licencing ageement

I seek to write a licencing agreement between a ‘new’ sole trader and ‘his’ limited company of which he is a director and owns all voting shares?

The director has a dedicated office whole room from which he works but it is from home.

The licencing agreement becomes a contract between the sole proprieter and limited company and payment from the limited company would be for using landlines, broadband, smart phone contracts, lighting, heating and water and ‘canteen facilities’ for one person director. 

Payment would be for line rentals, business and incidental private use.

(All above are personal contracts between the sole proprieter and providers.)

Licencing agreement purpose.

Because this it is an arms length contract with the ltd company it circumvents all obvious personal tax problems of personal contracts between director and company and being able to charge the ltd company for business calls only and having to submit  P11DX applications-and being forced to abide by its dispensation rigour and conditions regarding what can be claimed for the above utility services.

Action:

The sole proprieter charges ltd company an arms- length rent, consistent with rented office costs with services, in the local area.

The company claims the arms-length rent as a business expense in its profit and loss account with no additions for private use.

The sole proprieter sets up the licencing contract as a business and completes a self- employment page in his personal tax return recording the trade as a ‘serviced office’ business.  He claims for expenses in the profit and loss account for all above costs for both line rentals and business use for landlines, broadband, mobiles, gas and electricity and ‘canteen’ costs and only disallowing incidental private use and claiming these against his arms length rent.

He is able to claim because the contracts are in his personal name.

My questions:

  1. Must the licencing contract be written by a solicitor or could I draft this myself?
  2. I am interested to read from accountants who have completed a licencing agreement on behalf of either themselves or clients?
  3. Did HMRC raise objections, asking to sight the licencing contract and seeking to disallow the contract with all its ramifications ?   
  4. What would be your planned response should HMRC write to you raising objections?
  5. Could a licencing contract be pre- sought in the same way as a dispensation so that the licencing contract itself becomes a dispensation?
  6. Because the licencing agreement is a sole source of income in the self-employment page could this in itself be a reason for HMRC disallowing the contract? (personally I cannot envisage their grounds for objections?)
  7. It is not an arms length transaction.

Ramifications:

If HMRC were to successfully challenge the contract then there are issues with additional corporation tax and their writing back of expenses in the self-employment page thereby leading to additional SchD1 tax.

 Conclusion:

If the above were to be successful there would be a small schedule D1 charge. 

However, if successful then the advantages are amazing. 

Clients would be able to use a dedicated office room at home and charge their company for its use by being able to rely on a single contract between proprieter and ltd company and not worrying about dispensations or what credits to make to their director’s loan account.

(I understand the ramifications of notifying Councils and being subject to business rates and potential problems with contents insurance.)

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