Related companies and market rents

Related companies and market rents

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Client owns 100% of company A and 50% of company B.  Company B owns an asset which A has use of.  Is B required to charge A a market rent for use of the property and, if so, are there any exceptions?

I have always been sure that related party transactions need to be charged at MV but I cannot find anything in black and white to say that a lower rent cannot be charged.

In addition, the fact that ER encourages individuals to let their businesses have use of their assets free of charge to preserve the availability of ER on a future sale would lead me to believe that there has been a rule change at some point that I must have missed but if there is then for the life of me I cannot find it.

Any advice or a point in the right direction would be greatly appreciated.

Replies (7)

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By johngroganjga
06th Jan 2015 14:17

There is no requirement to charge any rent at all.  But the co-owner(s) of company B would presumably have something to say about that.  So the rent to be charged is a matter for negotiation between your client and the co-owner(s), and it is difficult to see how what they end up with would not be, by definition, the market rent.

So isn't your question academic?

Or are your client and the co-owners related to each other?

 

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Replying to Roland195:
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By dhughes1975
06th Jan 2015 15:35

Thank you John for your quick reply at such a busy time of the year.

There is a relationship between the co-owners and my client and they are happy to let company A have use of the asset without charging a rent as otherwise the property would likely not be used at all in the short term. 

Is the only requirement then that the company makes proper disclosure of the fact that the property has been let to a related party at less than market value in the accounts?

One issue that may complicate things is that company B is vat registered and company A is not.  Company B also opted to tax when purchasing the property and has charged tennants VAT in the past.  Does this change the position? 

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Replying to carnmores:
paddle steamer
By DJKL
06th Jan 2015 15:48

Appear to have ceased making taxable supplies re property

dhughes1975 wrote:

Thank you John for your quick reply at such a busy time of the year.

There is a relationship between the co-owners and my client and they are happy to let company A have use of the asset without charging a rent as otherwise the property would likely not be used at all in the short term. 

Is the only requirement then that the company makes proper disclosure of the fact that the property has been let to a related party at less than market value in the accounts?

One issue that may complicate things is that company B is vat registered and company A is not.  Company B also opted to tax when purchasing the property and has charged tennants VAT in the past.  Does this change the position? 

The fact that Company B appears to have ceased making taxable supplies would concern me, however I am not expert on vat and property, I just know it can be tricky.

Sure someone else will be along to give chapter and verse but for starters  VATA 1994 Sch 6 para 1 (if still extant as older Tolleys) indicates that where connected parties  HMRC can direct that vat requires to be accounted for at market value.

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Replying to Red Leader:
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By dhughes1975
06th Jan 2015 16:28

I take your point. 

I take your point. 

I realise this is pedantic but if no rent was charged at all, does that not technically mean that part (a) fails as a supply will not have been made by a taxable person for a consideration of money?

(1)Where

(a)the value of a supply made by a taxable person for a consideration in money is (apart from this paragraph) less than its open market value, and

(b)the person making the supply and the person to whom it is made are connected, and

(c)if the supply is a taxable supply, the person to whom the supply is made is not entitled under sections 25 and 26 to credit for all the VAT on the supply,

the Commissioners may direct that the value of the supply shall be taken to be its open market value.

 

I realise that it would probably take a long fight in court to get the answer to that one but food for thought at least!

 

 

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Replying to lionofludesch:
paddle steamer
By DJKL
06th Jan 2015 16:53

If no supply

dhughes1975 wrote:

I take your point. 

I realise this is pedantic but if no rent was charged at all, does that not technically mean that part (a) fails as a supply will not have been made by a taxable person for a consideration of money?

(1)Where

(a)the value of a supply made by a taxable person for a consideration in money is (apart from this paragraph) less than its open market value, and

(b)the person making the supply and the person to whom it is made are connected, and

(c)if the supply is a taxable supply, the person to whom the supply is made is not entitled under sections 25 and 26 to credit for all the VAT on the supply,

the Commissioners may direct that the value of the supply shall be taken to be its open market value.

 

I realise that it would probably take a long fight in court to get the answer to that one but food for thought at least!

 

 

No idea if this applies but if no supply is made then is there not the risk of  acapital goods scheme clawback of input vat previously claimed?

This is the sort of question where I tend to "phone a friend" and pay for an opinion as the vat amounts re commercial property can be significant.

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By johngroganjga
06th Jan 2015 15:43

Yes the only requirement is to disclose in both companies' accounts that A enjoys rent free occupation of B's property.  The requirement is to disclose what transaction has taken place - not to go on to provide an evaluation of it as to whether it is market value or not etc.

No the fact that B would add VAT to any rent charged is not a reason why it has to charge any. Indeed it is is a good reason why it should not. 

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By User deleted
06th Jan 2015 16:43

For completeness

Transfer-pricing? Probably not in this case, but one never can tell when only scant information is provided.

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