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OPINIONS PLEASE

OPINIONS PLEASE

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I'm helping a partnership draft their annual accounts. The spouse of one of the partners has lent the partnership a sum of money. The lender is not a partner in the firm.

Referring to security for the loan the agreement states

"Security for the loan will be by the adoption of the fixtures & fittings. During the period of the loan, the fixtures and fittings will be transferred in the lenders name. The lender shall have full title to the fixtures & fittings on completion of an independent valuation to be paid for by the lender. Any additional fixtures and fittings bought during the term of the loan will automatically be adopted by the lender who shall similarly have legal title over them."

Normally the F & F would remain on the balance sheet and the security would be dealt with by way of a note but I'd be interested to hear what others consider should be the correct treatment for the fixtures and fittings in this instance and the implications for VAT and capital allowances.

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By bernard michael bayly
29th Jun 2011 15:50

Loan to company

If it is as you have stated, this a normal transaction involving Vat. The F & F should not then be on the Balance Sheet as they don't belong to the client. Why does she not just have a charge over the F&F without acquiring title ( similar to a bank) ?

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By law man
29th Jun 2011 16:24

Security in firm's assets

Take care; it seems the proposal is to take security for repayment of the loan in the form of a mortage or charge of certain assets: you call them "fixtures anf fittings".

"adoption" of assets. In substance it will be a mortgage.

"fixtures" these form part of the land, and so are owned by the owner of the land. If the firm/ borrower owns the freehold, or a valuable leasehold interest, take a mortgage of that land.

"fittings": these are chattels (goods) such as desks, chairs, and office equipment. If the borrower is an unincorporated firm, the mortgage will be a security bill of sale. This is highly technical and should be dealt with by an expert.

If the borrower is a company, the mortgage must be registered at Companies House.

In any case, is the relevant asset already mortgaged or charged elsewhere e.g. to the firm's bank? If so the new lender will probably rank second; while the bank may object to a second charge.

The relationship is a loan: no VAT on interest or repayments.

No Capital Allowances: there is no purchase of assets.

If the lender makes more than this one off loan, she may be engaging in a business and need a consumer credit licence.

Proceed with caution and take advice from an experienced solicitor.

 

 

 

 

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By J Smith
30th Jun 2011 11:15

thanks
Thanks Bernard Michael. I don't know why this was done either it seems totally unnecessary to me and just complicates everything.

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By J Smith
30th Jun 2011 11:25

thanks
Thanks law man.
My thoughts relating to tax issues were along the lines that if the assets have to be removed from the balance sheet presumably the partnership will have to account for VAT on them and will also have a disposal for CA's purposes. When they reacquire title to the assets they will then be entitled to claim CA's at that point but as the lender is not VAT registered they will not be able to claim input tax on them as they are not acquiring them from a taxable person.
I can't see what the point of such a security clause was in the first place.

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By law man
30th Jun 2011 14:16

Balance sheet , Capital Allowances, and VAT

I understand the proposal to be a loan to the firm taking security in (a mortgage of) the assets (fixtures & fittings).

As an accountant you know best, but surely this does not involves the firm transferring ownership or not having the assets on its Balance Sheet. The loan will appear as a Liability (Current or Long Term depending on when it is due for repayment).

Neither the loan or interest payable are subject to VAT: interest is VAT Exempt.

 

 

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