This site uses cookies. By continuing to browse the site you are agreeing to our use of cookies. To find out more about cookies on this website and how to delete cookies, see our Cookie Policy.
Analytics

Tools which collect anonymous data to enable us to see how visitors use our site and how it performs. We use this to improve our products, services and user experience.

Essential

Tools that enable essential services and functionality, including identity verification, service continuity and site security.

Where Taxpayers and Advisers Meet

Property developer

Brightonian
Posts: 99
Joined: Wed Aug 06, 2008 3:31 pm

Property developer

Postby Brightonian » Fri Apr 09, 2010 11:11 am

My client has been making returns as a property developer for a number of years. he has bought and sold various properties together with various friends and each ahve returned their share of the profits. In 06/07 he sold a property and this was returned in the usual way. Since then, there have been several abortive purchases, incurring costs, and he has had the usual admin costs of running a business from home, but he has not bought or sold a property since 2007. The 2007 return is under enquiry by HMRC and they are seeking to disallow all admin costs and all costs not directly related to the maintenance and sale of the property sold in that year. They say that only costs related to that property are allowable - the figures in the accounts should relate to income and expenditure incurred in arriving at a net profit from this property alone. In effect, they seem to be saying that each property bought and sold is a separate trade. I have not come across this before. Are they right? I should be grateful to hear the views of others.

pawncob
Posts: 4321
Joined: Wed Aug 06, 2008 4:06 pm
Location: West Sussex

Re: Property developer

Postby pawncob » Sun Apr 11, 2010 6:26 pm

If he's trading, then any costs incurred are allowable. HMRC can't define each purchase/sale as a separate trade. What would happen if the purchase to sale period was three years? Would they claim it was a cessation and recommencement?
With a pinch of salt take what I say, but don't exceed your RDA

mullet
Posts: 3242
Joined: Fri Nov 06, 2009 9:26 am

Re: Property developer

Postby mullet » Sun Apr 11, 2010 6:33 pm

The 2007 return is under enquiry by HMRC and they are seeking to disallow all admin costs and all costs not directly related to the maintenance and sale of the property sold in that year.
Is the Inspector getting confused with the principles of work in progress/closing stock or closing debtors/creditors?

I can't think of a better example (except maybe farming) where there will be significant peaks and troughs outside the person's control, with the possibility of losses for a couple of years and then big profits.

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Property developer

Postby Incredulum » Mon Apr 12, 2010 11:26 am

I must say I am a little confused. Prima facie your client is very unlikely to have more than one trade and I am bemused.

But. Is the inspector saying that your client has not been correctly capitalising costs into stock? Instead perhaps writing off the costs of stock as they have been incurred?

Or saying that the trade has ceased (have all properties been disposed of?) and that ongoing admin costs are not available to be carried back?

Or saying that because each property traded has been with a different (group of) partner(s) that each property has been worked by a different trade?

Can you post the actual wording of his letter and provide a little more background (you may find it easiest to write in Word and then copy and paste into the reply box).

Brightonian
Posts: 99
Joined: Wed Aug 06, 2008 3:31 pm

Re: Property developer

Postby Brightonian » Mon Apr 12, 2010 12:01 pm

Thank you for your help. The Inspector has not stated specific grounds but has simply said the following - I have removed references to the property address:
'I note a number of the expenses calimed have not been incurred against costs relating to the corresponding income returned, in respect of the property at (address). Expenditure cannot be deducted in computing trading profits, unless it si incurred wholly and exclusively for the purposes of the trade. the accounts returned as property developer should relate to the income and expenditure incurred wholly and exclusively in arriving at a net propfit from this property alone.'
She then goes on to say that all general admin, motor, travel etc costs shoudl be disallowed. She states travelling from his home to plavce of work is disallowable - so she must feelt hat the property was his place of work? She also wants to disallow L&P costs incurred on an estate agent's report on a property that was considered for purchase but not, in t -he end, purchased.
Whiel she has not given specific grounds for her assertion, she could be thinking of the fact that he has not gone through with any purchases follwoing the 2007 sale (the market has not been good for the kind of properties he favours) and/or the fact that he has developed properties in the past with several friends - they ahve not all been involved in the same purchases and sales. he may have one property with A and B and a second property with A&C and the next property with B and D and so on.

She finishes by asking for my agreement or comments and to let her know under which legislation I consider to be relevant and allowable! I can't for the life of me see under which legislation she considers them to be disallowable.

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Property developer

Postby Incredulum » Mon Apr 12, 2010 12:21 pm

Your client is caught because each trade has been undertaken by a different partnership, and so each trade is a separate trade. Here is some guidance you may find helpful. http://www.hmrc.gov.uk/manuals/bimmanual/bim70550.htm

I wonder where the place of business is for each trade. I suspect it has to be the site in question - otherwise it would be difficult to know if it was A's house or B's house.

The L&P fees to which you refer are therefore disallowable as they do not appear - from what you write - to relate to any trade at all.

Brightonian
Posts: 99
Joined: Wed Aug 06, 2008 3:31 pm

Re: Property developer

Postby Brightonian » Mon Apr 12, 2010 1:32 pm

Thank you. That si very disappointing to hear. I shall check with him that I was correct about the people involved. Would it make a difference if he had in fact developed each property with the same two people? However, he has told me that he would be unlikely to buy a further property with one of the people involved.
Is this really a partnership? Could it be argued that he is simply running his own property business but that he sometimes acts with others - who presumably return their income and expenditure in the same way.
If he buys a new property in the future, can he only claim costs directly relating to that property or can some of the general admin costs incurred now be treated as pre-trading expenditure and claimed when the property is sold?
He is also a partner in a property development business, a firm of accountants prepare the partnership accounts and I simply make the appropriate entries ont he partnership pages of the return. The formal partnership was entered into because of the need to obtain a large bank loan for a development, which the bank would not do if they were not in a partnership.
Thank you again for your help.

Incredulum
Posts: 2723
Joined: Thu Dec 03, 2009 5:35 pm

Re: Property developer

Postby Incredulum » Mon Apr 12, 2010 1:53 pm

Possibly there's no partnership, but I'd incline towards feeling that there is. This may help:

http://www.hmrc.gov.uk/MANUALS/bimmanual/BIM72005.htm

You write
which the bank would not do if they were not in a partnership.
and possibly mean which the bank would not do if the bank did not have documentary evidence that they were in a partnership - this evidence which would make joint and several liability easy to prove in court.

If all properties were developed with the same people, then the same partnership would have done the work and a single trade would exist.

Yes, some of the current admin expenses may be pre-trading expenditure. The problem appears to be the range of partnerships he uses. Particularly when it comes to the tax nothings for abortive expenditure.


Return to “Business Tax”