News
Relocation - a tax minefield - 2010-06-03
Moving rented premises is a fraught and expensive event at the best of times. What is more, insurance businesses might inadvertently get themselves into VAT, PAYE, capital allowance and capital gains difficulties as a result of relocating. This article considers how these difficulties can arise in a little more detail.
VAT
When moving into leased premises it is commonplace for fitting out work to be undertaken to bring the property up to your requirements. The landlord will often take this opportunity to carry out works to the fabric of the building and will require you to carry out these works (referred to as Category A works) at the same time as the fit out work (Category B works). When this happens it is usual for the landlord to make a capital contribution or grant a rent concession to recompense you for the cost of the Category A works. The tenant will appoint a building contractor to carry out both the Category A and B works and will be invoiced for the works, plus VAT.
It is common for the tenant to treat the VAT incurred on the Category A and B works as normal input tax and process it through their VAT return. On the face of it this appears correct. But insurance businesses commonly have an input tax recovery restriction through being partially exempt, which means that an unnecessary VAT liability is being created in respect of the Category A works, due to the work being carried out on behalf of the landlord.
Even if you are able to recover all of your input tax, there is still an issue with the VAT on the Category A works, particularly if the landlord is unable to recover all its input tax through not having opted to tax the building in question. If you recover the input tax on the Category A works, HM Revenue & Customs might regard this as tax avoidance and act accordingly.
PAYE
In carrying out Category A works on behalf of the landlord, you might become subject to the Construction Industry Scheme (CIS) whereby the landlord is considered the main contractor and the tenant the subcontractor in respect of the works. If the landlord has incurred costs in respect of such work in excess of £3m (excluding the value of materials if separately itemised) then the landlord must register under the CIS and withhold 20% of the value of the labour element to be returned to HMRC as a PAYE payment. When this happens you, as the tenant, must likewise register under the CIS to offset the withholding tax against your own PAYE liability. Occasionally HMRC will waive the CIS requirements for both landlord and tenant, but this can only happen if certain conditions are met.
Capital allowances
A number of changes to capital allowances affecting the refurbishing and fitting out of properties were introduced in April 2008. A capital allowance at 10% per annum was introduced for certain assets incorporated into a building, such as electrical, lighting and cold water systems. Other expenditure such as air conditioning and heating had capital allowances reduced to the lower rate. Refurbishment or filtting out projects can involve hundreds of expense items, each of which need to be assessed for capital allowance purposes. It is essential to review all costs to maximise the tax savings or to avoid the cost of HMRC enquiries or penalties arising from incorrect claims.
Capital Gains Tax
When moving to new premises, a business may also dispose of its interest in a previous property, which may amount to a disposal of a freehold or long lease interest, or an inducement payment by their landlord to terminate a lease early. Such transactions may give rise to chargeable gains, which are subject to corporation tax, or to capital gains tax for non incorporated businesses.
The costs of fitting out a new property may also be capital in nature, and in many circumstances you may be able to claim rollover relief to reduce certain chargeable gains (notably gains arising from property used in the trade) in the previous three years by the amount reinvested in new capital assets.
Where the reinvestment is made into 'wasting assets', i.e. plant or machinery, or leases with under 60 years to run, the amount deferred is taxed 10 years after the reinvestment occurs. However, this amount can again be reinvested to further defer the tax charge arising. If a disposal of the new assets is made before the 10 year anniversary date, or in all other cases, the amount claimed as rollover relief reduces the base cost of the new assets (for computation of future gains) by the same amount.
In summary
Relocating to new premises is fraught with danger and significant tax liabilities can arise for the unwary. If you have relocated in the last four years, or intend to do so in the future, you should seek advice to ensure the tax implications have been, or will be, dealt with correctly.
Bob Jones is a tax partner specialising in indirect taxation with over 30 year's experience. He has wide experience of all aspects of VAT, import/export procedures and IPT, with extensive experience of property transactions and the insurance market. You can contact Bob on 020 7516 2295 or email rjones@littlejohnllp.com
