Commercial Client Reference Articles

Who Pays the Rates?

When a company that is the tenant of a property goes into liquidation, it is normal for the liquidator to disclaim the lease on the premises.

Business rates must be paid by the 'person entitled to possession of the property' (Local Government Finance Act 1988). If the landlord reoccupies the property, then it is clear that the landlord will bear the liability for the rates. However, if the landlord leaves the property vacant, is it still liable?

In a recent case, the liquidator of the tenant disclaimed the lease. The lease was subject to a guarantee and the landlord left the premises unoccupied, making a claim against the guarantor of the lease for the rent shortfall. This gave the guarantor the right to occupy the premises if it so chose.

Once the lease had been disclaimed, the local authority demanded the rates from then on directly from the landlord. The landlord refused to pay, claiming that since the guarantor had the right to call for a lease, the landlord was not the person entitled to possession of the property and had not, in fact, occupied it.

The High Court rejected the landlord's argument. The landlord had the right to immediate possession of the property once the lease had been disclaimed. The disclaimer of the lease meant that there was no longer any lease.

In addition, although the guarantor had the statutory right to demand a lease on the premises, it had not done so.

If you are a landlord, a carefully worded guarantee clause could avoid the problem by making the guarantor responsible for the rates as well as the rent in the event of the insolvency of the tenant.

 

Guide to IHT and Small Business

Inheritance Tax (IHT) is payable on a deceased person’s estate (exclusing their principal private residence for whaih an extra allowance is available) at 40 per cent above £325,000 (2017/18) – the current nil rate band. However, business property is treated differently from personal property and may qualify for  Business Relief, formerly called, and generally known as Business Property Relief (BPR). Businesses benefit from a more generous taxation system because of their role in providing economic growth.

BPR can provide 100 per cent relief from IHT on a sole trader’s business or partnership interests and can apply to shares in trading companies that are not quoted on a recognised stock exchange. Shares quoted on the Alternative Investment Market can also be eligible for 100 per cent BPR. There is no limit to the value of BPR which can be claimed. Business assets must have been owned by the donor for two years to qualify for BPR and the business in respect of which a claim is made must also be wholly or mainly a trading company. Investment companies and businesses dealing in shares, stocks, securities, lands or buildings do not qualify for BPR.

BPR at 50 per cent is available on land, machinery, plant and buildings used for business purposes, although they will need to have been owned and used mainly for business purposes within the past two years. It is also available for shares in quoted companies where the shareholder has a controlling interest of more than 50 per cent, although this is rare.

In the context of a family business, it may be preferable for a donor to leave IHT-exempt assets to a beneficiary other than their spouse or civil partner. There is no saving if business assets are passed to a beneficiary who would not be liable for IHT anyway. For example, a transfer of business assets qualifying for BPR to a spouse would achieve no IHT saving on that transfer, because transfers between spouses are normally exempt from IHT in any event. There are several issues to consider and expert advice is essential when undertaking IHT planning with regard to business assets.

No BPR is available where there is a binding contract for the sale of a business. This might occur where there are a small number of shareholders who have a shareholders’ agreement which requires that should one of them die, their executors will sell his or her holding to the remaining shareholders, who are required to buy it.

Even where shares would not qualify for BPR, the £3,000 annual tax-free allowance for IHT is available. A shareholder can use this to pass shares to anyone of their choosing. This can be used to give the beneficiary a gradually increasing interest in the company, reducing the IHT payable on the donor’s death. However, care should be taken because the values of ‘slices’ of the shareholdings can vary massively depending on what the voting rights involved are: never transfer shares without taking professional advice on the likely tax implications.

As an alternative approach, a person may choose to sell or wind up their business rather than leave it to beneficiaries in their will. They would then be able to leave liquid capital to their beneficiaries instead. This has the advantage that the value of the business would be precisely fixed and available in cash. However, cash does not qualify for BPR, so this approach has significant drawbacks.

The current law particularly benefits small businesses that are family owned trading companies. They will be likely to qualify for BPR and make the most of the possible IHT saving.

Employed or Self-Employed?

Whether you are employed or self-employed makes a substantial difference to how you are taxed and the income tax liabilities of an employed person can be very different from those of a self-employed person with similar levels of gross income. The National Insurance liabilities of the employed and self-employed are also calculated differently and entitlement to benefits, such as Jobseeker’s Allowance, also varies depending on one’s employment status.

It is therefore important for any working person to know their exact employment status. Sometimes, however, deciding whether someone is genuinely self-employed or an employee can be difficult and HM Revenue and Customs are unforgiving of those who ‘get it wrong’. However, they do produce fact sheets to help people make the correct decision.

Guidance from HMRC on the related tax issues can be found here

It is quite possible to set up a 'self-employed' relationship which is caught by the rules and will be treated by HMRC as an employer/employee relationship. The cost to the employer of having such a relationship 'redefined' as one of employment can be massive, so it is essential to make sure that any such arrangements are watertight. There is a special regime dealt with under IR35 which will bring some payments made to limited companies into the PAYE regime. 

In 2014 regulations were brought in to bring more contractors into PAYE to prevent the use of 'false self-employment' intermediaries, which typically involved schemes using an 'umbrella company' or an offshire company.

More recently, a number of employment law cases have been heard which deal with the employment status of people in the 'gig economy'. Whilst change in the tax law should be expected as a result, it is important to note that the tax law relating to employment status does not directly flow from the law from employment law purposes. In particular, the fact that someone may declare their own income and pay taxes as a self-employed person does not mean they are self-employed for income tax and national insurance purposes.

When is an Environmental Impact Assessment Necessary?

The The Town and Country Planning (Environmental Impact Assessment) (England and Wales) Regulations 1999 apply to any development likely to have significant effects on the environment by virtue of its size, nature or location.

If a Local Authority fails to follow correctly the requirements and procedures set out in the regulations, this can result in planning permission being successfully challenged.

If no EIA is carried out, this can lead to a challenge in the courts.

For example, a decision to grant planning permission to erect residential units, on land contaminated as a result of its former use, was quashed in the High Court on a point of law because the Secretary of State had unlawfully taken proposed remediation measures into account when determining whether an EIA was necessary. It was judged that where an EIA was required, the regulatory scheme required separate information to be provided on the likely environmental effects and measures to reduce or remedy those effects. This decision was then challenged in the Court of Appeal.

The Court of Appeal ruled that while in some cases, where the remediation required would be 'modest in scope', it can be proper to take the proposed measures into account when determining whether an EIA is necessary, this would not be the case where more uncertainties are associated with the remediation measures: in effect, saying that each case must be looked at individually. On the facts of this particular case, the court decided that the Secretary of State could not have properly concluded that the likely environmental effects were such that an EIA was not required.

In the second case, a challenge that it had been unreasonable and unlawful for a Local Authority not to require an EIA was overturned. The High Court held that there was no 'bounding principle' requiring an EIA. Only 'significant' effects would bring a development within the scope of the EIA Regulations. It was for the Local Authority to judge and their decision in this case had been reasonable and lawful.

A recent decision by the court to limit the costs of a protestor who objects to a development near Hampton Court shows that the courts take the environmental aspects of planning decisions seriously and are willing to try to ensure that objectors on environmental grounds are not deterred by the potential costs of taking their challenge to the court.

More recently a planning appeal was decided (in favour of a development opposed by the local planners) after the court stressed the importance of developments which had an impact on local employment levels.

Uing environmental grounds to opposeg developments seems to be becoming more frequent and consideration of any potential environmental challenge at an early stage is advisable.

Landlords - Dealing With Pre-Pack Tenants

Businesses in financial difficulties are increasingly seeking ways of ridding themselves of extra costs and, in many cases, premises let in more promising economic times are viewed as a substantial and avoidable liability, especially for businesses which have expanded too quickly.

One of the more common ways for a business to be restructured on a more profitable basis is to arrange to take the profitable parts into a new business by doing a ‘pre-pack’ administration – a procedure whereby the business, or part of it, is transferred to a new entity. Prior to this, the business will be placed into administration, which imposes a moratorium on legal processes, such as the landlord’s right to make the lease forfeit by peaceable re-entry.

The argument for pre-packs is that they maximise the chance of salvaging the business and preserving employment. On the downside, the creditors of the original business are often left nursing losses.

From the landlord’s perspective, a tenant which undertakes a pre-pack may well leave the rented unit behind if it is uneconomic to retain it, thus leaving the landlord facing the prospect of finding a new tenant and a loss of rental income.

If the new business wishes to retain the unit, there may be scope for the landlord to negotiate with the new occupier with regard to arrears of rent as well as adherence to the lease covenants.

The good news for landlords is that in most cases they should be entitled to retain a rent deposit paid by a tenant that goes into administration.

A recent case has also confirmed that it will be difficult in many circumstances for administrators to assign a tenancy 'by operaton of law'  - the landlord will normally have to made it unequivocal by its conduct that the prior tenant's tenancy had ended and a new tenancy begun.

 

 

Removing or Modifying Covenants Over Land

 

Covenants over property are a potential nightmare for developers but fortunately there are circumstances in which a covenant can be removed.

If the beneficiaries of the covenant for which removal is sought cannot be persuaded by negotiation to give up their rights, an application under Section 84 of the Law of Property Act 1925 may be made to the Lands Chamber of the Upper Tribunal (UT) for the covenant to be removed or modified.

This can be granted on the following grounds (in simplified terms):

  • Where the covenant is obsolete or where a reasonable use of the land concerned would be impeded unless the covenant is removed or modified;
  • Where those adults that benefit from the covenant agree to its removal or modification;
  • Where the removal or modification of the covenant will not cause a detriment to those who benefit from it;
  • Where the UT is satisfied that the covenant does not provide any practical benefits of substantial value or advantage to those entitled to benefit from it; or
  • Where it is contrary to the public interest for the covenant to remain and money will provide adequate compensation for those persons who will suffer from its discharge.

In practice, the UT will make its decision on an application to vary a covenant based on the specific facts of the case – there is relatively little in case law by way of guidelines. It is therefore important for those seeking the removal or modification of a covenant that the best possible case is made at the outset in order to persuade the UT that the arguments for the variation or removal are compelling.

 

 

 

SIPPs and Your Business Property

The Self-Invested Personal Pension (SIPP) was introduced in order to give people far more control over how their pension pots are invested and have proven to be very popular with pension savers.

One common use of the SIPP in a business context is to sell business premises to the SIPP. Having a property in a pension fund means that any growth in the value of the property will accrue tax free. Furthermore, a market rent paid to the SIPP as landlord will not be taxed in the fund but will be an allowable deduction for Income or Corporation Tax by the payee. The accumulated surplus in the SIPP will be in a 'free of tax' environment.

If the building is 'opted for VAT', the SIPP can register for VAT and reclaim the VAT on the purchase and subsequent expenditure, albeit with an extra compliance cost as a result of the VAT registration.

There will also be costs associated with property ownership and management.

However, there can be disadvantages in certain circumstances and having a trading property in the hands of what is, in effect, a third party might add complexities to the sale or restructuring of a business. If such a sale goes forward without the need for the property, a void period could lead to the SIPP having a deficit and requiring additional funding from the SIPP members.

Properties tend to represent quite large sums and if the need to sell arises, it can sometimes prove difficult to accomplish a satisfactory sale expeditiously – and the cost of selling property is relatively high.

 

 

 

How to Reclaim Foreign VAT

It is commonly thought that within the EU, recovering VAT on expenditure made whilst abroad is merely a matter of calculating the VAT at the applicable rate and claiming it via your VAT return.

However, the right to recover VAT on a VAT return is limited to VAT incurred in the country of registration. Overseas VAT is reclaimed by submitting a claim directly to the country concerned (this is called an ‘8th Directive claim’). Typically it can take months (sometimes years) for these claims to be processed and the VAT repaid.

For more details on recovery of overseas VAT, see HMRC's website.

A number of firms offer a VAT reclaim service in exchange for a fee, which is normally based on a percentage of the VAT repayments received.

Overseas VAT which is incorrectly claimed as input tax on a VAT return can lead to an assessment for VAT over-claimed and possibly trigger a penalty.

When the UK exits the European Union, the procedures for reclaiming VAT (if they remain in force) are likely to change considerably.

Tax Avoidance Disclosure Rules

UK tax law is almost unique in that it contains regulations which require professionals to advise HM Revenue and Customs (HMRC) of information regarding tax avoidance schemes (TAS). Failure to comply can lead to a penalty of up to £5,000 plus other charges.

HMRC regard a TAS that ‘distorts the tax system’ as being abusive and the purpose of the regulations is to enable them to respond quickly in order to block loopholes in the tax law. Where HMRC are advised of a TAS, they can attack it, if they think it involves an incorrect interpretation of tax law, or they can take measures to close it down by new legislation.

View the disclosure rules.

Tax avoidance is now subject to the General Anti-Avoidance Rule, which seeks to tax 'abusive' uses of tax law, in partcular arrangements that lack commercial purpose but have the effect of reducing tax liabilities.

Since 1 August 2006, TASs have had to be notified to HMRC shortly after they have been implemented. A TAS must be disclosed when:

  • it will, or might be expected to, enable any person to obtain a tax advantage;
  • that tax advantage is, or might be expected to be, the main benefit or one of the main benefits of the arrangement; and
  • it is a tax arrangement that falls within any description (‘hallmarks’) prescribed in the relevant regulations.

The hallmarks referred to are various, but the main ones are:

  • it is kept confidential from other promoters of tax advisory services;
  • it is kept confidential from HMRC;
  • it is marketed with a premium fee; or
  • it is a scheme involving manipulation of losses or loss schemes.

If one or more of the above criteria are satisfied, then the scheme is a TAS and must be disclosed. Similar rules apply where the scheme is an ‘in-house’ avoidance scheme.

Once HMRC have been advised of the scheme, they will issue an eight-digit scheme reference number which must be supplied to users of the scheme and which they, in turn, must include in a return to HMRC.

Despite the occasional claim by tax consultants, HMRC never 'approve' as tax-avoidance scheme.

HMRC have published a guidance note on such schemes which can be downloaded from their website.

HMRC are continuously seeking to obtain details of UK resident holders of foreign accounts from all banks throughout the world and have entered into a number of information sharing agreements with foreign tax authorities, including several well-known tax havens noted for their secrecy laws.

HMRC have recently announced that they are intending to seek to require taxpayers' agents to provide lists of clients who have undertaken certain types of tax avoidance schemes.

The HMRC web page on disclosure of tax aviodance shemes is periodically updated to include the latest announcements by HMRC on the subject.

 

Brief Guide to the Administration of Troncs

The long-running series of disputes between employers in the hospitality industry and HM Revenue and Customs (HMRC) concerning the taxation of employees’ tips and their National Insurance (NI) status seems to have been concluded by the issue of series of guidance leaflets on the operation of ‘troncs’.

HMRC have, in effect, accepted the industry’s contentions regarding these. The following points have been clarified:

  • no approval from HMRC is required for the appointment of a troncmaster;
  • the troncmaster can be anyone other than ‘the employer, business partner, or official of the company’ (so a manager is acceptable);
  • the business can retain discretionary service and non-cash tips without compromising the NI status of the tronc – only the sums passed to the troncmaster constitute the tronc; and
  • any amount of tronc paid in excess of tips specified in the employee’s contract of employment does not incur a NI liability.

From 1 October 2009, tips have longer been counted as part of the National Minimum Wage, regardless of how they are paid.

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