Property Renovations / Close Company VAT & Cor tax

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I am having a bit of a nightmare reading around the subject. Very likely to refer this 1 on for at least a second opinion. However before I do, i hoped for some input from The AWEB community ...

Client is a VAT registered limited company that is operating from (part of) a building owned by the 2 shareholders (husband & wife).

I'm lead to believe the property is a commercial property (although given all the different information I keep receiving I wouldn't be surprised if the building was a residential building, that said i am interested in how this may changes things).

There is no documented lease in place establishing a right to use/occupy the property. No rent being paid either.

Limited company has gone and paid for new boiler, flooring and insulation.

Director wishes to claim the vat back on spend and claim costs against Corp tax liability.

My understanding ..

VAT - the supply would be deemed as made to shareholders directly, not the limited company therefore no input tax reclaim.

Corp tax - no capital allowances avaliable (insulation/boiler) as no right to occupy is established in the absence of a lease. Flooring is not allowed as a repair because there is no asset owned to repair.

Is my understanding sound or are there some contradicting views?

Replies (39)

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DougScott
By Dougscott
09th Apr 2024 22:41

VAT - if company paid it, work is invoiced to the company, and the company occupies
the space why not claim the VAT? As for CT, capital allowances would surely be allowed on fixtures and fittings which these items may be?

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Replying to Dougscott:
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By PFunk1980
09th Apr 2024 23:17

It is the absence of a formal lease that is bugging me. I assumed as no lease = no interest in the property and therefore for vat the supply would be deemed to have been made to shareholders. CT, no interest in property therefore no claim available.

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Replying to David Ex:
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By PFunk1980
09th Apr 2024 23:29

Without a lease I thought there is no interest in the property for capital allowances?

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Replying to PFunk1980:
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By David Ex
09th Apr 2024 23:41

PFunk1980 wrote:

Without a lease I thought there is no interest in the property for capital allowances?

That’s what the link seems to say.

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By FactChecker
10th Apr 2024 00:04

The common features of any examples you're going to find in HMRC manuals (per David's helpful places to start) and indeed pure common sense/logic (with apologies to TD) is ... you MUST have total clarity regarding ownership & any leases of the property *before* attempting any analysis.

VAT of course has its own rules, so I'd bow to any expert in that field ... but the usual starting point is that input tax cannot be 'reclaimed' if the expenditure wasn't incurred in the line of business (which feels like a stretch to me here if the company doesn't have 'an interest' in the property - and might well be excluded even if it did). It's certainly not just a matter of whether it paid a bill that was addressed to it.

I am assuming that "a building owned by the 2 shareholders (husband & wife)" means owned by them as individuals not through some other vehicle ... but as I said, I feel you have to get to the bottom of ownership/leases/etc before wasting any more time on this.

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Replying to FactChecker:
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By PFunk1980
10th Apr 2024 00:44

Many thanks for the thorough response.

Yes, as far as I am aware the building is owned by the husband and wife personally, no vehicle involved.

There is no lease in place, only an informal agreement by the husband and wife that the company can operate from the building (the only company employee is the husband/director/shareholder).

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Replying to PFunk1980:
DougScott
By Dougscott
10th Apr 2024 09:01

Well if you are worried about it just tell the shareholders it would be advisable to put the "informal agreement" in writing. If the space is being used by the company there is a de facto lease in place.

I once claimed back VAT on the construction of my home office and claimed CAs on the fixtures and fittings and had a visit from HMRC and had no issues and they never asked to see a lease as it was self-evident I was using the extension to my residential property for my company's office. The company was however paying a monthly rent for the office. That's not to say it wouldn't be a good idea to be able to show a lease to HMRC.

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Replying to Dougscott:
paddle steamer
By DJKL
10th Apr 2024 10:00

Consideration.

In your case there was rental consideration being paid for the office, maybe the lease was not documented in writing but a contract appears to exist, the payment of rent evidencing same.

Where nothing in writing and no consideration, as in the OP's case, is there a contract? (And I am assuming not in Scotland where our law of contract can allow for a contract without consideration in some odd circumstances)

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Replying to DJKL:
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By PFunk1980
10th Apr 2024 10:26

No this is the NE England, almost Scotland but not quite! ;-)

The lack of documentation around the lease makes this feel a little like the company is settling a bill(s) of the 2 Shareholders.

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By Tax Dragon
10th Apr 2024 09:08

I take it you don't act for the shareholders and don't know what they do with the rest of the building - let it out, live in it, etc?

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Replying to Tax Dragon:
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By PFunk1980
10th Apr 2024 09:21

I have represented the husband for a small amount of time (1 tax return) but no dealings with the partner. The building has previously been used to house the Partner's sole trader business, which as far as I am aware is winding down.

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Replying to PFunk1980:
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By Tax Dragon
10th Apr 2024 10:36

Couple of points. Are the boiler, flooring and insulation just for the part of the building used by the company? Obvious tax concerns if not.

There's also an issue with things that are attached to land: do they form part of the land asset? If so, ownership immediately rests with the landowner. Where that landowner is employed by the person incurring the expense, as here, this gives a BIK concern - don't ignore David's point.

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Replying to Tax Dragon:
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By David Ex
10th Apr 2024 11:10

Tax Dragon wrote:

Where that landowner is employed by the person incurring the expense, as here, this gives a BIK concern - don't ignore David's point.

Confession time. I think I nicked that from one of your previous posts.

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paddle steamer
By DJKL
10th Apr 2024 10:02

Can there be a lease without consideration? When we want to grant a right of use we always document and have in place a peppercorn rent, usually £1.

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By CJaneH
10th Apr 2024 10:03

I would like to make 3 comments.
1 Ownership of land can be determined by requesting information from the Land Registry for the princely sum of £3.00.
2 If you have suspicion's about use of building do a drive by (or walk by) You may be able to determine if fully commercial, and if other tenants.
3 Providing you believe that the new business (trading via Ltd Co) is in good faith then I would not have a problem with the CH boiler or flooring.
As others have stated an informal written lease might be advisable.
As these are new clients, only time is lost, if you using the clients names and address's you search Co House and the internet and see what you find.

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Replying to CJaneH:
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By PFunk1980
10th Apr 2024 10:25

Thanks for your thoughts, the land registry will certainly be a good shout.

Your point 3, what was the reason you are fine with Boiler/flooring but not insulation? (if I understand your post correctly)

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Replying to PFunk1980:
DougScott
By Dougscott
10th Apr 2024 12:43

Boilers and flooring are often thought to be fixtures and fittings, insulation probably not.

And surely it is simple enough to formalise a lease from the date the company first used the space - not exactly rocket science.

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Replying to Dougscott:
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By FactChecker
10th Apr 2024 15:36

Is your time-travelling device patented? And can I have a lend of it?

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Replying to FactChecker:
DougScott
By Dougscott
10th Apr 2024 15:48

I think the OP has already said there is an unwritten agreement in place, it just needs to be formalised. It's not "time travel" it's using a bit of gumption.

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Replying to FactChecker:
paddle steamer
By DJKL
10th Apr 2024 16:05

"Notwithstanding the date of execution , both parties herewith confirm that this lease commenced on ..............................................."

Over the years have done a few of these, however usually the tenant did have some form of previous agreement and the paperwork is a retrospective tidying up rather than a brand new lease/licence.

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Replying to DJKL:
DougScott
By Dougscott
10th Apr 2024 16:33

Precisely - all that is happening is turning a verbal/unwritten agreement into a written agreement. A lease is often executed after the lease starts and it happened many times when I was involved in property. FactChecker needs to get his facts right if he's going to use a moniker like that.

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Replying to Dougscott:
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By FactChecker
10th Apr 2024 17:33

This forum, by its very nature, tends to provide a dearth of the facts that would be useful (and I'm not alone in desiring them) ... but in this case OP said:
"There is no documented lease in place establishing a right to use/occupy the property. No rent being paid either."

And your previous comment (to which I replied referencing time travel) only said:
"it is simple enough to formalise a lease from the date the company first used the space" ... with no mention of a pre-existing "verbal/unwritten agreement".
Why do you "think the OP has already said there is an unwritten agreement in place"?

Of course, there *may* be unknown unknowns around, but as it stands we've not been told of any "verbal/unwritten agreement" waiting to emerge from a chrysalis.

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Replying to FactChecker:
DougScott
By Dougscott
10th Apr 2024 21:18

If you read the thread properly you'd see that the OP said there was an informal agreement.

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Replying to Dougscott:
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By Tax Dragon
10th Apr 2024 22:02

A licence is not a lease.

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Replying to Dougscott:
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By FactChecker
10th Apr 2024 23:02

Don't know why you can't let go ...

The only reference by OP to an 'informal agreement' appears (in full context) as:
"There is no lease in place, only an informal agreement by the husband and wife that the company can operate from the building."

That's not the same as your claim of "OP said there was an informal agreement"
... but I'm not wasting more time on someone who accuses me of needing "to get his facts right" and not "reading the thread properly", whilst being selective in your extracts to try making a non-existent point just because you didn't like a comment I made.

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Replying to FactChecker:
DougScott
By Dougscott
11th Apr 2024 10:50

You are the one who accused me of having a "time machine". The fact is you don't need a written agreement for an agreement to exist. Personally I can't see the difference between an "informal agreement" and an "informal agreement" and not sure what your point is.

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Replying to Dougscott:
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By FactChecker
11th Apr 2024 13:04

"Personally I can't see the difference between an "informal agreement" and an "informal agreement" and not sure what your point is."

The same as Tax Dragon's point above - on 10th Apr 2024 at 22:02

But enough already ... these exchanges are no longer illuminating for other readers.

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Replying to Dougscott:
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By Tax Dragon
11th Apr 2024 13:50

Dougscott wrote:

The fact is you don't need a written agreement for an agreement to exist.

Agreed - and before I posted to say so (badum tsh).

But does that (or anything else here) override s53 LPA 1925, that says no interest in land can be created or disposed of except by writing? And the writing might need to be done by lawyers (I suspect it's a reserved activity under LSA). But ianal myself, so I'll leave those thoughts there.

Fwiw I also agree with FC - absent useful additions, we've all already said enough. (DJKL's consideration question left hanging - though clearly s54(2) LPA cannot apply without full consideration.)

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Replying to CJaneH:
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By More unearned luck
11th Apr 2024 16:01

"1 Ownership of land can be determined by requesting information from the Land Registry".

But only of the legal ownership.

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By PFunk1980
11th Apr 2024 15:11

*Sigh

On further digging into town planning info the property appears to actually be a residential property NOT commercial.

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Replying to PFunk1980:
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By FactChecker
11th Apr 2024 15:40

You may need a whole new thread :=)
or just a whole new client?

FWIW if you're now digging ... an equally simple check of corroboration would be to check whether local Council are charging domestic Council Tax or Business Rates.

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Replying to FactChecker:
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By PFunk1980
11th Apr 2024 16:00

Thanks FactChecker!!!

That's exactly what I thought. #CanOfWorms

Any ideas how you go about checking that? Of course I could ask the client but .....

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Replying to PFunk1980:
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By FactChecker
11th Apr 2024 18:30

Sorry, no ... I'd thought it'd be simple (each council maintains a Council Tax list and a Business Rates list - with some 'composite properties', like shop with flat above, appearing on both).

But, although I can't see any reason for privacy if you only want to know the type for a property (not who is paying it), my local Council will happily tell you but ONLY via:
- your paper council tax bill; or
- in My Account (online).

EDIT: I've just found https://www.tax.service.gov.uk/check-council-tax-band/search that will tell you which, if any, band of Council Tax is currently applied to a specific property ... just enter full postcode and then select property address from drop-down list.
Presumably if it doesn't appear anywhere on that list then it's likely to be subject to Business Rates?

STOP PRESS: now found https://www.gov.uk/find-business-rates ... happy hunting!

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Replying to FactChecker:
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By PFunk1980
11th Apr 2024 19:04

BINGO!!!

I found it (or should I say you did), suggests it is commercial! No new thread needed. ;-)

Turns out the property has planning permission to turn into residential.

Although I still need to sort out the mess from a commercial property perspective, at least some of the facts are being confirmed.

Thank you soooo much for spending some time to respond to my questions.

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By richard thomas
12th Apr 2024 10:18

I am not going to attempt to answer the VAT aspects – I do not pretend to know anything about VAT in this area at least.

As to corporation tax, the problem with the OP’s question that I have is that we are not told what the company does. We can surmise that it carries on some sort of business as it is VAT registered, but whether that is a trade, a property business, an investment business or something else can make a difference to both capital allowances and deductions for expenses.

Let’s assume it carries on a trade from the part of the building it occupies. Let’s also assume that the boiler is not situated in that part and that the flooring and insulation referred to includes the whole building not just the occupied part.

Take capital allowances first (yes that’s the wrong way round, as it cannot be capital expenditure if it is allowable in computing income, but hey!, at least there’s a clear answer).

Boiler

A boiler is a fixture. We know that from s 173(1)(b) CAA 2001.

Section 176 says:

(1) If—

(a) a person incurs capital expenditure on the provision of plant or machinery for the purposes of a qualifying activity carried on by him,

(b) the plant or machinery becomes a fixture, and

(c) that person has an interest in the relevant land at the time the plant or machinery becomes a fixture,

that person is to be treated, on and after that time, as the owner of the fixture as a result of incurring the expenditure.

Does the company have an interest in the “relevant” land. That land is in the case of a boiler the building in which it is installed as part of a space or water heating system (s 173(2)(b)).

The company does not have a written lease, we know. But it occupies part of the land and it can be presumed that the owners of the freehold, who handily are also shareholders of the company, have given the company permission to occupy – so they have at least a licence, whereas trespassers will (or William) not, and that is enough for the company to have an interest in land – s 175(1)(e). But does their occupation of some of the building give them an interest in the whole building, the relevant land – I would say yes.

Thus they can claim allowances by virtue of Chapter 14 Part 2 CAA, but only if they carry on a qualifying activity – we assume a trade – and the expenditure is capital expenditure on the provision of plant or machinery wholly or partly for the purposes of the trade, and, as a general rule, they own the asset as a result of incurring the expenditure. The general rule is of course set aside by the fixtures legislation.

The question is what part of the boiler is used by the company – that requires an apportionment – s 205 CAA.

Insulation

Here s 28 CAA applies. But note that s 27(2), like Chapter 14, modifies the general ownership rule:

(2) This Part (including in particular section 11(4)) applies as if—

(b) the person who incurred the expenditure owned plant or machinery as a result of incurring it.

The apportionment rules apply where the insulation is only partly of the occupied part.

Flooring

Starting point is section 21(3)(c) and List A item 1. And finishing point. No CAs.

Thus the question of the nature of the interest of the company in the land is irrelevant. It may be a licence, and probably is, but a lease of business premises may be made orally or in writing, and may be very informal.

Deduction in computing profits of trade.

To be allowable the expenditure must not be capital within the tax meaning, nor can it be deducted if it is capitalised. If it is expensed and counts as a renewal, but not an improvement, of part of an entity, it is in principle allowable. The best candidate here is the renewing of the flooring.

If it qualifies, the question is then whether the expenditure was incurred wholly and exclusively for the purposes of the trade. The answer if the whole building was refloored is no. Can an apportionment be made – yes, if s 54(2) CTA 2009 applies.

Does it matter who owns the land (and therefore the building) or the land actually occupied? I do not think so – the question is whether the actual expenditure was incurred for the purposes of the trade, not was it incurred on an asset the trader owns.

What I hope I have shown is that land law issues are not necessarily relevant, and that the terms of each relevant piece of law have to be examined.

I note that some have mentioned BiKs. That is a very tricky question into which I shall not go, save to make two remarks. First it is a benefit within the benefits code in ITEPA only, if at all, by virtue of Chapter 10 – residual benefits. The Apollo Fuels doctrine still applies to such benefits, and it seems to me difficult to say what profit in general terms is made by the landlords, and it is certainly difficult to quantify the taxable benefit if it arises. For example much of the benefit of the expenditure would go to the other tenants. Heaven forbid that this calculation would be needed under mandatory payrolling.

Is it relevant that if the landlords had themselves incurred the expenditure they might well have got a larger amount of relief in terms of tax?

Second – we do not know from the OP if the landlords are the directors of the company. If they are not, then of course s 1064 CTA 2010 might apply instead of the benefits code. That gives rise to even more issues. As the expenses are treated as a distribution, would the company get a deduction for renewing the flooring: s 1305 CTA 2009 suggests not. As to CAs in this situation I do not know what the answer is.

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Replying to richard thomas:
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By Tax Dragon
12th Apr 2024 15:42

Posts like this demonstrate the low level of thought most of the rest of us put into our analyses. If indeed the contributions most of the rest of us make are deserving of the descriptor "analyses".

I'm with you through to when you start discussing BIKs - and quantifying the "profit" for the landlords. That sounds like ITTOIA talk (eg Ch4). Surely BIKs are based on cost, much easier to measure?

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Replying to Tax Dragon:
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By richard thomas
12th Apr 2024 16:09

No it isn't - it's Apollo Fuels talk.

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Replying to richard thomas:
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By Tax Dragon
12th Apr 2024 19:04

Ah, understood. Is there a de facto benefit?

I very much doubt that the landlords share your difficulty seeing such a benefit, having obtained consent to convert the property to residential and then had the company pay for new flooring etc.

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