August Q&A
Partner Andrew Wayness provides the answers in this month’s Q&A.
Is a charity’s loss-making event exempt from VAT?
Q. We are a charity that is registered for VAT. We recently held a fundraising event, treating the income as being exempt from VAT, but the event made a loss. Should we treat the income as standard-rated on our next return as it did not raise funds for the charity?
A. The key issue is whether you intended to raise funds for your charity, projecting a surplus for the event, or whether the reality was that it was a social event where you were hoping to make a surplus, but the primary objective was for people attending to enjoy themselves.
For example, there are many reasons why fundraising events might make a loss. This could be due to bad weather, poor ticket sales, higher costs than anticipated. This is fine, as long as you promoted the event as being a fundraiser in your advertising and promotional material and that you also intended to make a surplus. If so, the VAT exemption on your income is still correct.
Do the ‘use and enjoyment’ rules apply to hirings?
Q. Our business hires out electronic equipment to business customers, many of whom are from overseas. We have never charged VAT on the sales for our non-UK customers because they are not a UK business. However, a contact has said that we should charge VAT because of the ‘use and enjoyment’ rules. Is this correct?
A. The ‘use and enjoyment’ rules are intended to tax certain services where they are consumed. In other words, the general business-to-business (B2B) rule about the place of supply being where your customer is based do not apply. It is all about where the service is used, i.e. your equipment is used by the overseas customers in the UK, so you should charge 20% VAT on the hirings.
The following services are taxed where they are consumed under these rules:
‘Hire of goods, including means of transport; electronically supplied services (B2B only); repairs to goods under an insurance claim (B2B only); and radio and television broadcasting services.’
Errors made on your past VAT returns should be corrected for the last four years.
Can I gift my half of a house tax-free?
Q. I do not live in the house, but I do not have my name on any other property. The house was gifted to my brother and I years ago by our father. There is no mortgage. The house is probably worth £40,000 more now than when it was purchased.
A. If you make a gift to someone, capital gains tax (CGT) rules deem it as though you sold to them at today’s market value. If the say the house is worth £40,000 more now than when it was purchased, the bottom line is that you need to look at its market value when your father transferred to you (£X). If it is worth more today than £X, then the difference (£Y) is a potential capital gain, and if you transfer your half to your brother, you need to pay CGT on half of £Y, less your CGT annual exemption, if you haven’t used it.
Motoring expenses for work or personal use, what are the rules?
Q. I am a property landlord. My accountant only allows 20% for my motoring expenses and has told me that this is the maximum that HMRC will allow as my tax band rate is 20%. I know you can change over to mileage at 45p per mile. However, a joiner friend told me that his accountant allows up to 80% of his motoring allowance against his tax, and he is on the same tax band as me. Are the percentages on motoring allowance fixed for property landlords like me according to your level of tax, or can it be on a sliding scale? For instance, if I’ve used my vehicle more for managing my rental property in one year, can my accountant increase the percentage on my vehicle allowance, or is it fixed at 20%?
A. HMRC’s Property Income Manual states: ‘The landlord may use a car or van partly for business and partly for private purposes. If so, they can split the running costs on a mileage basis and claim a deduction for those journeys undertaken wholly and exclusively for business purposes.’
So, there is no need to correlate your motoring allowance expenses to your marginal rate of tax (i.e., 20%). Your percentage motoring allowance expenses is dependent on the facts in each year, and if in one year (say) half your total mileage is qualifying business mileage, you can claim 50% of your total motoring expenses as allowable.
Are refurbishment costs allowable if living in the property?
Q. I have rented out my property for the last ten years while I lived overseas. I have now returned to the UK and intend to live in the property for a maximum of 12 months. The house is in a poor state. I plan to spend approximately £70,000 on bringing the property up to standard for renting again and live in it as I do this work. Once the work is complete and the property is ready to rent again, I will buy a house to live in and re-let the rental house.
Can I deduct the costs against future rent once it is let again? Are there any implications of me living in the property as the costs are being incurred? Are there any other implications of this plan that I should be aware of? I’m a higher-rate taxpayer and have a residential mortgage (I had permission to let whilst I was abroad).
A. If you are going to live in the property while refurbishing, HMRC would probably not allow this expense because they would claim that you did it for your own personal benefit, and not for the purposes of the rental business. However, if you did not live in the property while refurbishing, this expense should be allowable. Since the period between the old tenancy ending and the new tenancy starting is a maximum of 12 months, this gap is less than the three-year figure quoted in HMRC’s Property Income Manual, and so would qualify for ‘the rental business not ceasing’.
