Furnished Holiday Lets

Every week we take a look at what is trending in the accountancy and tax press and share items that we think will interest you. However, these are only outlines and where they relate to tax planning should not be acted upon without looking into them more completely as everyone’s circumstances are particular to them. You need to take specific advice appropriate to your own circumstances.

While every effort is made to deliver accurate, informative and balanced articles this content is general in nature and should not be used as the sole basis for making decisions.

 

 

Furnished holiday lets

Jeremy Hunt announced that furnished holiday let (FHL) status will be abolished from 1 April 2025. However, no draft legislation has been published and no guidelines issued by HMRC. Might suggest that it was a last minutes decision.

When a letting business qualifies as an FHL it does not amount to a trade, but a number of tax breaks apply that do not apply to a general letting business, including:

  • business asset disposal relief (BADR) can apply to the disposal of the business;
  • holdover and rollover relief can be claimed;
  • finance costs can be deducted in full;
  • plant and machinery capital allowances can be claimed;
  • profits can be strategically allocated to co-owners easily;
  • profits count as relevant earnings for the purpose of working out the pension annual allowance.

The abolition of FHL status means that these breaks will be lost, but although this will not be effective until 2025, an anti-forestalling rule will prevent the obtaining of a tax advantage through the use of unconditional contracts to obtain capital gains relief under the current FHL rules.

However, the detail of this rule is still awaited, so there is currently uncertainty about whether capital gains reliefs on disposal will apply.

The most significant change to a continuing business will be the restriction of relief for financing costs (particularly mortgage interest). Instead, relief is given as a reduction in tax but restricted to 20% of the finance costs.

You can see that these Budget measures relating to property were intended to encourage sales of second properties. The year’s delay in implementing them gives owners a chance to reflect and still take advantage of CGT breaks by selling now.

In these circumstances, it will be important to ensure entitlement to business asset disposal relief (BADR). If the business is unincorporated, the trigger will be the cessation of the business activity after which the properties can then be sold and qualify as an associated disposal within three years.

The cessation should take place in the 2024–25 tax year.

Remember that the FHL status must have applied for the two-year period ending with the cessation date.

 

 

New CT Rates: Associated Companies

On 1 April 2023, the main rate of corporation tax (CT) increased to 25%, but certain companies with smaller profits continue to pay only 19%.

Under the new rules, the small profits rate of 19% will apply if a company’s relevant profits are below £50,000. The main rate of 25% will apply if those profits are over £250,000. Companies with profits between these limits will be subject to marginal relief and will pay an effective marginal CT rate of 26.5%.

Where a company has one or more ‘associated companies’, the relevant thresholds for applying the main rate are divided by the number of non-dormant associated companies, plus one, effectively splitting the potential benefit between them.

It is therefore important to understand which companies are associated as this can have a significant impact on the CT rate, and the quantum of tax due.

A company is an associated company of another company if one has control of the other, or both are under the control of the same person or persons.

An associated company is counted even if it is only an associate for part of an accounting period. A company’s tax residence is irrelevant – it may be an associated company no matter where it is resident in the world.

However, an associated company that has not carried on any trade or business at any time during the accounting period is disregarded.

‘Control’ for these purposes means that a person can or is entitled to exercise direct or indirect control over the company’s affairs. The legislation states that a person will be regarded as having control of a company if they possess or are entitled to acquire:

  • the greater part of the voting power in the company;
  • the greater part of the share capital or issued share capital of the company;
  • the greater part of the income where distributions are made to participators, or
  • the greater part of the assets which would be available for distribution among participators on any winding up.

Ordinarily, it is possible to identify control by reference to the share capital and voting powers of the company. However, special rules also apply to small companies with 5 or fewer directors/shareholders as follows:

  1. In determining control a person is attributed with the shares etc of his personal associates e.g. relatives, partners etc.
  2. Substantial commercial interdependence – The purpose of this rule is to take the existence of other companies into account, for the purposes of the small profits rate, where there is a substantive relationship between the relevant companies. However, this does apply where any ‘association’ is an accident of circumstance, including circumstances of family relationships that do not extend into business. When considering whether there is substantial commercial interdependence, regard should be given to the degree of financial, economic, or organisational interdependence between the companies.

 

 

Taxis and TOMS

In a recent case heard by the First-tier Tribunal mobile ride hailing services were found to fall within the Tour Operators Margin Scheme (TOMS).

The company supplies on-demand, private hire passenger transport services, which are ordered and paid for through a smartphone app.

An earlier ruling regarding Uber’s business model in the UK resulted in VAT being chargeable at the standard rate (20%) on its supplies of ride-hailing services.

In this case, it was decided that as the services fell under TOMS, VAT should only be calculated on the margin of a significant saving.

In the taxi and private hire industry, drivers have traditionally operated as self-employed individuals. The role of taxi associations or private hire companies has primarily been to act as intermediaries, facilitating the provision of services from these drivers to passengers.

Therefore, although the default VAT position is that fares charged to passengers for taxi or private hire journeys are liable to VAT at the standard rate, as most drivers individually turn over less than the VAT registration threshold they typically are not required to register for VAT. Consequently, neither are they obligated to charge and account for VAT.

According to HMRC, TOMS is a special VAT accounting scheme for businesses that buy and resell travel, accommodation, and certain other services as principal or undisclosed agents. Under TOMS, VAT is not charged on each individual sale. Instead, VAT is applied to the margin made by the tour operator, which is the difference between the total amount received from customers (riders) and the total amount paid to suppliers (drivers).

 

 

Camping Pods and Capital Allowances

Basic pods which are not fixed, are not structures or buildings for tax purposes. On the face of it, they are moveable and capable of and intended to be moved in the course of the qualifying business activity. They can therefore qualify for capital allowances, much like caravans.

If they are plumbed in, and for example have shower/toilet facilities, then they are fixed and cannot be moved and there is unlikely to be any intention that they should be moved. They have to be located in a fixed and identified place where there was access to the unground drain and then attached in a way which had a degree of permanence As such they do not qualify for capital allowances.

Basic pods are not buildings. In addition to not being fixed to the ground, the basic pods provided only a crude place to sleep, not living accommodation, and in many respects were no different from a tent. Fixed pods provide a significantly greater level of comfort amounting to living accommodation and are therefore buildings.

 

 

VAT Bank Details Fraud

HMRC has evidence of form VAT 484 being used in fraudulent attempts to gain access to businesses’ VAT repayments.

This is the form that can be used to update a company’s details with HMRC.

It includes the business’ contact information, return dates and bank details. HMRC is taking action to address this issue, including writing to businesses to confirm changes made to their details since January 2024.

To check if you have been affected by this type of fraud, check that your bank details are correct in your business’ tax account and that any expected repayments have been received.

 

 

Company size thresholds:

The UK government plans to lay legislation before Parliament this summer to increase by 50% the monetary thresholds that determine company size, with an intended effective date of accounting periods beginning on or after 1 October 2024.

There are currently 4 possible size regimes.

Companies must meet at least two of the three criteria in either their first-ever financial year or for two consecutive financial years to be able to qualify for each regime.

The uplift in thresholds will potentially enable companies to move down a size category and take advantage of the accompanying reduction in requirements.

Interaction with other changes

The Economic Crime and Corporate Transparency Act will lead to filing requirements change for small and micro-entities in the next year or two, with companies falling within either size regimes required to file their profit and loss accounts.

 

 

What is an Unlimited Company?

A private unlimited company isn’t something that you come across very often (although they may not be obvious as they don’t have to use unlimited in their company name).

An unlimited company is very much like a regular private company limited by shares. It must be registered with Companies House and have a memorandum and articles of association. There’s a director who manages the day-to-day running of the company on behalf of the shareholders. Persons of significant control and an annual confirmation statement must still be submitted to Companies House.

The main difference arises when insolvency occurs. When formal liquidation happens and the company is unable to pay off its debts, the creditors will be able to use the personal assets of the directors and shareholders in order to pay off the liability.

This means that regardless of how many shares you own, you are responsible. You could lose everything.

Think of it this way, an unlimited company is registered with Companies House but has the responsibility of a sole trader. Also, while an unlimited company has to submit most of the paperwork as a limited company to Companies House, they may not always have to submit accounts.

It is possible for a limited company to re-register as an unlimited company and vice versa.

There are some advantages of becoming an unlimited company, such as having a separate legal identity and allowing the company to take out contracts in its own name, rather than the names of the directors and shareholders.

Also, unlike limited companies, an unlimited company is not required to file annual accounts with Companies House, although the directors still need to prepare them. There are certain rules to this exemption so that during the relevant accounting period the company must not have been:

  • A parent company of a limited company
  • A subsidiary of a limited company
  • Involved in a Scottish partnership where other parties are limited companies.
  • Involved in certain sectors, such as banking or insurance.

If accounts do not need to be filed with Companies House, then financial information is not available for public record, meaning the affairs of the company are largely kept hidden from competitors. This can mean that the unlimited company could look through the financial information of their competitors while keeping their own hidden.

In the same way, shareholders’ dividends aren’t made public, which could prove to be attractive for some shareholders.

Of course, as with everything, there are also some disadvantages to your company being unlimited.

If the company has to liquidate there is no protection for the shareholders, and there is essentially no limit on what they can lose in order to pay back creditors. This is by far the biggest drawback to being an unlimited company, and is, in fact, the reason that many companies are limited companies. This is one thing you have to consider carefully before deciding whether it is right for you.

Another is that not many people understand unlimited companies and that includes many lenders and HMRC.

An unlimited company is formed in much the same way as a limited one. However, there are a few marked differences, such as only being able to register on paper, rather than being able to register online. To complete the form IN01 to register an unlimited company, you will need the following:

  • The proposed company name – which still needs to meet most of the rules for company names.
  • A memorandum and articles of association – There are no model articles of association for an unlimited company meaning you will have to adopt bespoke articles containing an unlimited liability clause.
  • A registered office in the UK
  • Details of at least one individual director.
  • Details of members or shareholders
  • Details of proposed People with Significant Control (PSC’s)

Once all of this information has been provided, checked and approved, Companies House will issue a certificate of incorporation for the new unlimited company.

 

 

Questions?

If you have any questions about any of these, you know where to find us. If you prefer, just give me a ring on 07770 738770 or email me at alan.long@thelongpartnership.co.uk.

CHAT TO US ABOUT

TAXES & ACCOUNTANCY

Striving to deliver exceptional financial services >>>

Scroll to Top