This involves "lending" money to his friend in the motor trade to buy a motor bike. When the bike is sold my client gets his "loan" returned with 50% of the money made on the deal. My client never owns (or even sees) the bike. There will be between 5 and 15 transactions a year depending on what comes up for purchase.
I have treated this money as loan interest as I couldn't see that it could be a trade as he does nothing besides paying money out and getting it back. The money is related to specific bikes. There is never a loss.
The tax helpline people were split on whether he was a trader or money lender. They said he would have to be registered as a money lender but he only lends to his friend - not the public.
It has recently been suggested that the money earned is commission. I can see the logic of this though it had never occurred to me as a possibility. What do others think?
If it is commission, should there be VAT paid? He is VAT registered because he does also buy and sell some bikes (I know - it actually gets worse but I will spare you the details)
If it is commission does that mean class 4 NI should be paid?
Related resources
Replies (57)
Please login or register to join the discussion.
I know I am bit slow and all that, but where in these transactions is the concept of 'the time value of money' which is an indicator of interest?
The reward is a function of the bike sale, irrespective of time. Indeed it is quite possible that the reward after 1 day for one transaction could be considerably larger than the reward after 1 year for another.
Where is the concept of the time value of money if a bike doesn't sell or is sold at a loss?
Asking for a friend.
I agree. Indeed, I tried to bring that into my summary of outstanding questions just now.
If the OP won't give more info, the OP won't get any more meaningful replies, as far as I can tell.
Not from me, not from you, not from Lion... We're all just p***ing in the wind - and I think you've all had too much of my p*** by now. Over to y'all.
I wonder what the situation would be if one of the bikes was stolen under circumstances where it wasn't insured?
Surely that would crystallise the issue.
Entry in the interest box. Note in the white space, which no-one will read.
Job done.
If HMRC query it, refer them to this thread and they'll drop the enquiry like a hot potato.
@ roseorgan.fsbdial (OP).
Somewhat "late to the party and a half", IMHO the income is very probably (see my "caveat" below) NOT any of the following:-
(1) Commission - which in essence is for monies received/receivable or paid/payable (not for the difference between the two).
(2) Partnership Income - there are in the world of business a myriad of transactions which contain an ELEMENT of "profit-sharing", but which fall short of rendering the parties partners. In that regard the bikes are presumably both purchased by, and sold by, the friend, who presumably furthermore incurs (and thus personally bears the cost of) other expenses in effecting the sales of the bikes.
(3) Self-employment trading/business income. The "badges of trade" litmus test points away from there being a trade/business (a material factor in that test being the "one customer" concept).
(4) Interest. The "reward" is not remotely linked to the time value of money.
By default, therefore, the Income is "Other Income", and should be shown on the relevant Tax Return(s) as such. More precisely, the figure to enter is the "50% of the Profit" figure (less any Expenses incurred by the receiver of that "50%"); with a "white space" note to show (a) the reason for entering this income in the "Other Income" section, and (b) the calculation.
As for the above-mentioned "caveat", one would (if the amount at issue is material) be best advised to gain a fuller picture of how the arrangement between the two friends (i) arose and (ii) operates, including consideration of any inter-action between the arrangement and the other business interests of the two parties.
From a practical perspective, one would calculate what the increase/decrease in Income Tax/Class 2 NI/ Class 4 NI (and possibly VAT) liabilities would be if HMRC were to successfully later challenge the "Other Income" concept; and take account of the maximum "increase" figure in determining what time costs one incurs in determining "which box to put it in". One should then, when making payment to HMRC, pay the amount which WOULD be payable if HMRC's challenge succeeded (to avoid the incurring of Interest and potentially Penalties).
Basil.
From a practical perspective, one would calculate what the increase/decrease in Income Tax/Class 2 NI/ Class 4 NI (and possibly VAT) liabilities would be if HMRC were to successfully later challenge the "Other Income" concept; and take account of the maximum "increase" figure in determining what time costs one incurs in determining "which box to put it in". One should then, when making payment to HMRC, pay the amount which WOULD be payable if HMRC's challenge succeeded (to avoid the incurring of Interest and potentially Penalties).
Basil.
So you think it not only carries Class 4 NIC but is standard rated for VAT - subject to thresholds etc ?? Or are you saying you don't, but HMRC might ?
@ Lion.
To respond to your query, the LATTER - ie yes, I AM saying that (subject to the "caveat" to which I referred) "HMRC might" disagree the "Other Income" conclusion which I have reached: if that conclusion of mine is correct, then of course no VAT and no Class4 (or indeed Class2) liabilities would arise.
When recommending that one "calculate" the potential exposure to additional Income Tax/Class2/Class4, I was thus recommending that one PAY (to HMRC) MORE than the figure shown on the "Personal Tax Computation" produced from the submission of the Tax Return.
Basil.