Tax Clinic June 2009: Interest Received, Rollover Relief, Deductible Expenses, Tax Residence, VAT Registration, Joint Income

In his June Tax Clinic, Malcolm Finney considers some recent forum queries, and explains some of the relevant tax issues: Timing of Interest Receipts, Rollover Relief for CGT, Deductible Tax Expenditure, Establishing non-Resident Status, VAT and Multiple Businesses, Joint Rental Income and Form 17

This month’s clinic looks at SIX issues:

1. WHEN IS INTEREST INCOME TAXED?

2. ROLL OVER RELIEF FOR CAPITAL GAINS TAX

3. IS TAX A DEDUCTIBLE EXPENSE?

4. ESTABLISHING NON RESIDENCY

5. VAT REGISTRATION AND MULTIPLE BUSINESSES

6. FORM 17 AND JOINT RENTAL INCOME

1.WHEN IS INTEREST INCOME TAXED?

Whilst for the sole trader, income and expenses are matched on an accruals basis (not a received/paid basis) this does not apply to individuals receiving interest income.
 
“toby713” raised this issue with respect to bond interest as follows ( Bond Interest Payable Yearly ) :

“I recently opened a bond with a building society which matures in August 2010. Interest at 4% is payable gross on maturity. Do I pay income tax on the full amount of interest in the year to April 2010/11 or may I calculate the amount of interest earned by 5 April 2010 and declare this for the tax year 2009/2010. The first option would take me over my personal allowance for 2010/2011 whilst the second would keep me under for both years”.

Unfortunately (as contributor “pawncob” confirmed) interest is subject to income tax when received and the accruals basis is inapplicable. Thus, for toby713, the interest received in August 2010 is subject to income tax in the tax year 2010/11 and cannot be apportioned as he would have liked.

On the other hand, this basis of taxation can be used to advantage by non-UK domiciled but UK resident individuals who, by investing in offshore bonds where the interest is only creditable on maturity and not each tax year, can possibly avoid the £30,000 remittance basis charge.

2.ROLL OVER RELIEF FOR CAPITAL GAINS TAX

Given the attractiveness of this relief it is perhaps a little surprising that there are not more queries on the site as to its application.

A recent query ( Rollover Relief Paying off Mortgage on Holiday Letting ) concerned the possibility of the relief applying on the sale of a guest house with the proceeds being utilised to redeem a mortgage on a holiday let business.

The relief is available to a person carrying on a trade where, within a defined time frame, sale proceeds arising from the sale of a business asset (e.g., land and buildings; goodwill; fixed plant and machinery) used in the trade are reinvested in their entirety (if 100% roll over is required) into another business asset. The effect of the relief is that the capital gain arising is deducted from the base cost of the new business asset acquired (i.e., the gain is “rolled-over”).

The relief is therefore not applicable to the circumstances posed by the above query; the application of the sale proceeds arising from the sale of the guest house to redeem a mortgage (albeit on a business asset) will not enable any capital gains arising on the guest house sale to be rolled-over. The purchase of another holiday let (but not a typical buy to let property) would, however, permit the roll over relief to apply.

Note, however, that one consequence of proposals contained in the Finance Bill 2009 re holiday lets will be to preclude roll over relief from applying to capital gains arising on their sale or on any reinvestment into such lets.

3. IS TAX A DEDUCTIBLE EXPENSE?

The query here concerned the issue as to whether income tax paid on the profit of a partnership is itself deductible in computing the partnership’s taxable profit ( Is the Payment of Tax a Deductable Expense [sic]).

The answer is “no” as confirmed by contributor “RAL”.

Income tax paid on such profits is an appropriation of profit and not an expense of earning those profits and thus is not deductible; for those who need convincing, see the case of Ashton Gas Company v AG (1906).

However, in some cases it may be possible to deduct one tax when computing liability to another tax (e.g., VAT if not VAT registered; relief for IHT against CGT).

4. ESTABLISHING NON RESIDENCY

It might be thought, quite understandably, that any tax practitioner worth his or her salt should be able to answer a query on non-UK residency quite easily. Unfortunately, despite “residency” being at the heart of the UK taxation system the rules which apply are a mixture of the law, court decisions and HMRC practice and as a consequence are complex and full of ambiguities; that’s even if you can locate all the relevant issues.

A recent query ( Establishing UK non-Residency ) asked if non-residency might be acquired as a consequence of a move to Singapore.

The suggestion in the query was as follows:

“From what I have read, my understanding is that I could be in the UK for up to 183 days from 6 April 2009 to 6 April 2010 and from then on, I could spend an average of 91 days per year in the UK over the full 4-year tax period from 6 April 2009 to 5 April 2013. Hence, if I used the full 183 day allowance this year, I could only spend around 60/61 days in each of the following 3 years in the UK. Is this a correct interpretation?”

None of the contributors appears to have directly answered the particular question raised above.

The short answer to the question raised is that the interpretation suggested is incorrect.

However, before any consideration of the averaging computation can be considered the taxpayer must demonstrate that he has left the UK, i.e., there is a “break” from the UK. If therefore the taxpayer were to leave the UK as suggested but return each successive tax year for, say, 60 days on average per tax year it is highly likely that UK residency would not have been lost.

If a break from the UK can be established then the “averaging 91 day test” comes into play; however, unlike as suggested, the averaging kicks on from the day following departure not from the previous 6th April.

From 6th April 2008 a day in the UK means presence in the UK at midnight on that day; departure at say 23:50 would mean non-residence on that day; pre 6th April 2008 days of arrival and departure were normally not counted as days of residence.

The terms of a double taxation agreement may impact on a taxpayer’s UK tax liabilities following departure from the UK including a resolution of any dual residency issues.

For those really keen, a peruse of the recently-released booklet HMRC 6 Residence, Domicile and The Remittance Basis may be enlightening (or not as the case may be!).

5.VAT REGISTRATION AND MULTIPLE BUSINESSES

The issue of whether the VAT threshold is exceeded where the taxpayer is involved in more than one activity (i.e., is the turnover in respect of each business aggregated) was recently raised by “FFS” and dealt with succinctly by “spidersong” ( Registration ).

FFS is a sole trader but also a partner in another unrelated business.

Spidersong commented:

“VAT registration deals with the Legal Entity running a business. So a Sole Proprietor 'A' in business is different to a partnership of A & B, which in turn is different to a partnership of A, B, & C, or A & C etc."

If a single entity runs multiple businesses i.e., A is both a motor mechanic and tree surgeon then these turnovers are amalgamated to decide whether A needs to be registered for VAT”.

Thus, in FFS’s situation there is no need to aggregate the respective turnovers and, on FFs’s facts, no VAT registration is necessary.

6.FORM 17 AND JOINT RENTAL INCOME

The issue of splitting rental income on jointly held property (real estate or otherwise) amongst the owners continues to be a topic regularly raised - see:

Does a Form 17 Election Have to Agree to Ownership Shares

Form 17 & Rental Income Split

Income Tax on Joint Rental Property

What is important to note is that the taxability of jointly held property is different for married couples  and civil partners, from that of other joint owners. The former have much greater flexibility as to how the rental income is to be split and taxed and similarly how any capital gains on sale can be split.

Form 17 is also only relevant to married couples and civil partners.

[For further information on this topic, please refer to Malcolm's article - The Principles and Implications of Joint Tenancy and Tenancy in Common for Spouses - Ed.]

Article Added Monday, 01 June 2009

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