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Residential Property income Vatable?

Residential Property income Vatable?

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I have husband & wife clients who are in a trading partnership, VAT registered, and also jointly own several residential properties. The VAT is calculated under the normal method. Now the wife is leaving trading partnership because she is a full time teacher, so husband will become sole trader & transfer VAT no. to his sole trade. If he then joins the VAT flat rate scheme, it seems to me that the property income will NOT have to be included in his Vatable turnover. The VAT helpline said the husband's portion of rental income has to be brought into the VAT turnover.

Can any one clarify this please? Thanks 

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By Montrose
05th Nov 2014 17:59

I am not sure the helpline is correct

The question is whether the joint ownership of property is a partnership and so an

[albeit exempt] VAT  business, or merely two indiviuals who have  separate interests in let

properties. If the latter then the helpline is correct. Have a look at the discussion at

http://www.hmrc.gov.uk/manuals/pimmanual/PIM1030.htm.

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chips_at_mattersey
By Les Howard
06th Nov 2014 10:23

And, FRS complication

There is a restriction on the use of the Flat Rate Scheme when there is an associated business. Notice 733, paras 3.8, 3.9 refer. You should check the detail here, to avoid a problem at a later date.

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Portia profile image
By Portia Nina Levin
06th Nov 2014 10:46

I do not completely agree with everybody I am afraid

VAT does not recognise partnerships at all. It recognises persons and that a person can be a collection of persons.

Where the partnership comprises the same persons that jointly own the property, the property business will be regarded as carried on by the same composite person that carries on the partnership business.

Where memberships differ, then you have different persons with different businesses. The soletrader and the joint property rental are carried on by different VAT persons.

As Basil says the PIM link on partnerships versus joint ownership does not apply for VAT purposes.

I do not think you need to go to town on documenting things though, provided the letting is demonstrably a business of both the husband and the wife.

For the associated business issue that Les refers to to come into play, there must be organisation, economic and operational links between the two. I would be very surprised if there are all three such links.

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RLI
By lionofludesch
06th Nov 2014 10:54

Agree with Portia

I wouldn't be including this income in the FRS calculations.

However, I would reiterate the need to make sure that the property is correctly registered in joint names.

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By cbp99
06th Nov 2014 11:02

Ownership joint or in common

Partnership is by definition conducted "in common". Property may be held jointly or in common. Therefore if held jointly, can it be a partnership? Just asking, I claim no expertise on the point.

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chips_at_mattersey
By Les Howard
06th Nov 2014 11:14

Rental Income

On the specific point about property rental income. This is included in the FRS turnover if the income is in the same legal entity. A number of people have been caught out on this point. Hence the important of having correct contracts in place for Sole Trader and Partnership, etc., as per the previous comments.

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By Montrose
06th Nov 2014 12:46

Partnership

Of course PIM 1030 is addressed to income tax considerations. What it does however is to discuss joint ownership of property generally in the context of partnerships. What I suggested, and everyone seems to agree with this point, is that the helpline may be incorrect.

Indeed VAT notice 742 at para 7.2 makes the point unambiguously.

It reads:- Joint owners of land or buildings

Where more than one person owns land or buildings, or receives the benefit of the proceeds from the grant of an interest in land or buildings, we treat them as a single person making a single supply for VAT purposes.

If the joint owners are making taxable supplies above the registration threshold they will have to register for VAT as a partnership, subject to the normal rules, even if no legal partnership exists. The joint owners may also request voluntary registration where the value of taxable supplies is below the registration threshold. 

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By The VAT Doctor
06th Nov 2014 20:02

Rare as hens teeth
I agree with Portia (wow). The only consideration is who are the legal owners of the investment property compared to the other business. HMRC seems to have said joint owners are effectively a number of sole proprietorships. This is not correct.

As a coincidence, I delivered a talk the other day all about the nasties that await you in the FRS. A point I raised, that I know Neil Warren did a Taxation article on as well, is that there is nothing in the law as I see it that prevents the sale of an investment property from falling into the FRS as well as the rent if the ownership matches. That's a very nasty surprise!

I do not like the FRS. Too many traps, people think it is simple (wrongly) and we are less likely to charge a fee for helping to prepare the return!

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Replying to DWM:
By The VAT Doctor
07th Nov 2014 06:56

All good comments

fawltybasil2575 wrote:

[1] May I very respectfully disagree The VAT Doctor's view that, in order to establish that [i] a sole trade and [ii] a source of rental income cannot be "aggregated" under the FRS, with the result that FRS VAT becomes payable on otherwise exempt rental income, the only consideration [in relation to the rented property] is "who are the legal owners".

 

If, for example, whilst the legal ownership of a property is joint between A and B, the rents are receivable solely by A , HMRC could maintain that the same "person" [A] is in receipt of two sources of income which must be aggregated to determine the gross income figure on which the FRS %age is applied.

 

Whilst frankly I suspect that, at Tribunal, HMRC would "win the day" [in the example case per my previous paragraph], then even if one considers that such rents should not be taken into account [and contends that the property is in the legal ownership of a different entity/person than the sole trader] it is at the very least taking a considerable risk ; and a risk which in my submission must not be taken - I remain therefore of the view that one should take all practicable steps to show that the rental income is that of a different entity/person.

 

[2] I am a strong advocate of the FRS, as indeed is Neil Warren ; albeit as I have said on many threads on this site, there are "traps for the unwary" in the FRS - as often, there is a judgment call equation between [a] potentially substantial VAT savings and [b] the possibility of falling into one of the "traps". With due care, one can save clients substantial VAT monies and avoid those "traps" .

 

I have dealt with many clients who have taken advantage of the FRS - in some cases, one has to be ever alert to the changes in which a client's business operates [eg a change from Outputs wholly related to charging for labour only, to a different business model where the Outputs include substantial materials]. From my experience, if one keeps close contact with the client's activities and financial affairs generally [including preparation of the VAT Returns], the client is happy to pay more, not less, for being guided correctly through FRS.

Basil.

Yes, you are right Basil. I forgot about the beneficial interest rules, which often applies to lifetime interest trusts, where one 'follows the money' to determine who the taxable person is, not the legal owner.

The FRS does indeed work for some, but one has to keep a close eye on things.

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