Would the anti-avoidance provisions apply in the situation where the son granted a tenancy to his father who then sub let to a third party?
Surely there is a way?
Portia Nina Levin wrote:
Absent such a transfer you are giving the income after you have received it, because it is not Dad's receipt, as he has no right to the receipt.
Would your reply be different if the tenancy agreement was in Dad's name and the tenant paid the rent directly to the father? The income would not have been received by the son at all and therefore there would be no need to consider the transfer of rights.
Secondly why not make the property business a partnership. As I understand it the profits of a partnership can be divided between the partners in any proportion they desire and varied year to year.
Son is legal owner
Not as straightforward as that alone.
Quote from First Tier Tax Tribunal decision:
"Under section 21(1) of the 1988 Act it states that "the tax shall be charged on and paid by the persons receiving or entitled to the payments. I interpret the wording that it can either be the person receiving or the person entitled to the payments that is charged to tax. The section does not specify that the persons entitled should be charged to tax before the persons receiving. Also there is no requirement in the statute for the person entitled to evidence in writing his surrender of that entitlement."
Your point is?>
The OP has asked how he can reduce the tax payable on the activity. He has asked whether by selling part of the plot he can convert some of the gain from income to capital. The tactic he has asked about is a perfectly legitimate way of doing so by interspersing a corporate body. It may not reduce the overall profit in reality but it will transfer some of the total profit from income to capital. That has the benefit of reducing the overall tax burden by utilising annual capital gains tax exemptions. Also as you say Corporation Tax on the company's profits will probably be at a lower rate than an individuals if the profit were to take them into a higher tax rate. There is also more flexibility on when to take dividends, which may further minimise any tax liability.
Am I wrong in thinking that part of the service we should aim to provide our clients is to minimise their overall tax burden by using the legislation that exists?
Why "get away" with?
An option available is to set up a company and sell the second plot to it. Provided the sale is at market value there is nothing illegal, ethically or morally wrong for the new company to then develop the plot for a profit. It is a common tax planning strategy.
As you rightly say if the plot is owned by more than one person then more than one CGT annual allowance will be available.
on whether there is an intention to create a legal intent. There is a long body of case law that examines whether agreements between family members are intended to be legally binding. A court would not try to discover the intention by looking into the minds of the parties. It looks into the situation in which they were placed and asks "would a reasonable person regard the agreement as intended to be binding."
There is no clear cut answer one way or another, as some of the answers posted by HMRC apologists assert. If it were so clear cut then a son or daughter making a contribution towards their keep would be taxable as income of their parents. A rather ludicrous outcome I would suggest.
It may well be that the family members would prefer the tenancy to be on a commercial basis and tax payable on the rental profit. For example the tenant may wish to claim housing benefit.
As the first respondent rightly points out if the property is let at below market rent then losses are not allowable, however if the property is let at market rent and losses are incurred then they are allowable. Of course family agreements must be difficult for authorities to prove, if your son, daughter, brother, sister, uncle, aunt, brother or sister wished to gift you money how could HMRC know or prove the intent?
Is it compulsory to have a bank account?
Whilst it is obviously very convenient to have a bank account, is there any statutory provision that makes it compulsory for an individual, or a body corporate for that matter, to have a bank account. In the absence of that condition why on earth should it not be acceptable for anyone to have money paid into someone else's bank account if they choose?
I think what is less acceptable is for an employer to refuse to pay an employee in cash if that is what the employee prefers.
My interpretation is opposite to yours
and I would not assert that the accounting rules for limited companies are unequivocal in relation to the entries to be shown in Statutory Accounts in respect of the Flat Rate VAT Scheme.
Extract from SSAP 5:
"As a general principle, therefore, the treatment of VAT in the accounts of a trader should reflect his role as a collector of the tax and VAT should not be included in income or in expenditure whether of a capital or revenue nature. There will, however, be circumstances in which a trader will bear the VAT, and in such cases where the VAT is irrecoverable, it should be included in the cost of the items reported in the financial statements."
My interpretation of "where the VAT is irrecoverable" is if the reporting entity cannot recover the VAT. Not as it appears in your interpretation where the VAT is not payable to HMRC.
FRSSE 2008 reflects the same principle:
"Turnover shown in the Profit and Loss account shall exclude either VAT on taxable outputs or VAT imputed under the Flat Rate VAT Scheme. Irrecoverable VAT allocable to fixed assets and to other items disclosed separately in the financial statements shall be included in their cost where practicable and material."
I treat it as Euan MacLellan suggests in the second paragraph of his reply. This gives a turnover figure for a business operating the Flat Rate VAT Scheme (FRS) directly comparable with other businesses not operating the FRS with another entry showing the additional income (or cost if the FRS scheme is unsuitable) attributable to using the FRS.
can you substantiate your assertion
may I advise that the accounting rules for limited companies are unequivocal in relation to the entries to be shown in Statutory Accounts ( the rules for unincorporated businesses allow more flexibility but for simplicity I shall explain the position for companies as your client is a company).
(1) Income must be shown inclusive of VAT (subject to the important "caveat" below).
(2) Expenses must be shown inclusive of VAT (no caveat)
Please forgive my ignorance, where exactly in the Companies Act or the Regulations issued by the Secretary of State does it say that income (by which I take it you mean turnover) should be shown inclusive of VAT?
It's a mixed supply
with part of it being zero rated and part of it being standard rated. I've purchased a mixed pack of biscuits from Costco (McVites and delicious they were) the VAT rate was averaged. Biscuits are zero rated but chocolate covered biscuits are standard rated.
I assume Costco have worked out the VAT element on the relevant portion of each and given an average to cover the VAT on the pack.