Pub company improves directors' property

Pub company improves directors' property

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I took on a new limited company client in its second year of trading - the first year's accounts had been done.

The property is owned by the husband and wife and the trade (a pub) is run through a limited company. During the first year significant property improvement were made and these are on the company's balance sheet. Most of the expenditure was paid for by the directors and so there is a significant directors loan account balance (slightly higher than the property improvements).

There is no formal lease in place and no rent was charged in the first years accounts.

After almost two years of trading (second year accounts in progress) the husband and wife have decided to lease the premises to a third party. They have done it in their own names.

My concern is:

1. A benefit in kind on the directors. The property has been improved and the directors are no benefiting because the condition of the property has significantly improved.

2. The VAT implications.

Possible solutions:

1. Although there is no formal lease in place is there a verbal lease (is there such a thing?) and can this be surrendered by the tenant (the company) to the individuals on payment by the individuals to the company. This would come out of the directors loan account.

VATLP02400 suggests that such a surrender would not be VATable?

Presumably there would be a capital gain calculation for the company, but the expenditure by the company in year 1 would be the base cost so there would be no taxable gain?

2. If the above doesn't work, should the company lease out the premises? This would suggest that it is the company that is going to benefit from the improvements and therefore reduce the chances of a benefit in kind arising. But for VAT purposes, presumably the company would have to de-register as the rental income would be exempt? And so on de-registration, the market value of the improvements would need to be declared and presumably VAT would be payable on this amount?

Any advice??  

Replies (11)

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By petersaxton
12th Nov 2015 06:35

It's all wrong

Two directors improve property they own yet for some unexplained reason the company is involved!

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Euan's picture
By Euan MacLennan
12th Nov 2015 11:19

The first accounts were wrong

Presumably, the cost of the work on the property was capitalised as tenants' improvements in the company's first accounts.  I agree with Peter that, as the directors paid for the improvements themselves, it is illogical to put them through the tenant's accounts.  The solution is simple.  Do a Prior Year Adjustment in the company's second accounts to correct the position or you could just transfer the fixed asset improvements to the directors in settlement of their loan to the company.

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By petersaxton
12th Nov 2015 11:27

Amending accounts

"significant property improvement were made and these are on the company's balance sheet"

wouldn't it be better to amend the accounts and the tax return as the property improvements are significant?

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By robvaughan
19th Nov 2015 11:45

 

 

Thank you for your comments.

Yes I agree, the position regarding the accounts is resolved by making a prior year adjustment (or just going back and amending the previous year). However, the issue I have if the VAT that the company has claimed on the property improvements (about £6K). The company would presumably need to pay this back! I am trying to see whether there is a way around this?

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By petersaxton
19th Nov 2015 13:11

What do you mean?

The way around this is to reverse the original entry.

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By robvaughan
19th Nov 2015 13:25

The original entry was to debit property improvemnets and debit inout VAT, thus reducing the VAT payable. So by reversing the entry there will be a VAT liability.

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By petersaxton
19th Nov 2015 13:59

Yes

That's what needs to be done. You shouldn't have claimed the original amount as input tax.

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Replying to Youareatit:
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By robvaughan
20th Nov 2015 12:01

Thanks Peter. I didn't. As I said in the question this is a client that came to me after their first accounts had already been done. I'm trying to sort out someone else's mistake and the purpose of the question was to see whether there was a way around this.

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Replying to Mr_awol:
By petersaxton
20th Nov 2015 14:31

Sorry

robvaughan wrote:

Thanks Peter. I didn't. As I said in the question this is a client that came to me after their first accounts had already been done. I'm trying to sort out someone else's mistake and the purpose of the question was to see whether there was a way around this.

Sorry about that. I don't think there is a way around it so it just needs to be corrected. Registering the directors as a partnership and registering for VAT maybe a way of getting around it as such. I suppose it is possible to treat the improvements as "goods" but I'm not sure.

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By DMGbus
20th Nov 2015 13:28

Leasehold property improvements - VAT recovery is OK

I regularly come across the term "Leasehold Property Improvements" - most often on farming accounts where the tenant has built a barn or carried out other commercial business property improvements.     The input tax in such cases has quite correctly been claimed and the costs capitalised on the Balance Sheet.  No problems in these cases where a formal lease is in place.

Personally I would advise a client in the pub trade (where the land and buildings are personally owned but the trade run by a Ltd Co) to do one of two things to protect the VAT recovery:

EITHER do what farmers commonly do without problems(as related above)

OR the freeholders (directors) opt to tax the property and therefore be eligible to recover the VAT as landlords [probably too late for this now, so concentrate on the well-established leasehold property improvements approach]

I am aware of one case where aTribunal mis-directed itself [and remains uncorrected] and gave an adverse decision on a leasehold property improvements case, but as is often said by HMRC "each case turns on its own facts" and in the mis-judgement referred to there were other dodgy elements to the overall tax case such that quite easily caused bias in the judgment of the tribunal against the taxpayer.

 

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Nichola Ross Martin
By Nichola Ross Martin
20th Nov 2015 14:53

You need an agreement

between the company and its owners. Too long to go into here, but if you contact me I can give you the heads up as I have seen many cases like this over the years.

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