Couple of questions on a new client

SS83

I am a fairly new member in practice and would be grateful i you could help me with some questions I have with a new client I have taken on

The client has recently started up a company printing photos on mugs, bags etc. The equipment he uses to do the printing is owned by him personally but I was wondering if the company would be able to pay him a reasonable monthly rent for the use of the equipment or would the company need to purchase the machinery from him and it be treated as a capital assessed and dereciated?

Also he has been trading for over a year and never VAT registered which is fine as he is below the registration threshold, however he has been charging VAT on this invoices since day one and showing 'VAT registration applied for'. Should I look to backdate the VAT registration and file the missing VAT returns?

Sorry if these are really obvious questions!

Thanks

groundy

First of all there is no tax benefit to your client renting the equipment to his own business. If he wants to own it and let the company have use of it, I cant see a problem.

Secondly, your client has either had some very bad advice early on or is very dodgy with regards to the VAT. If he has charged VAT then I would advise that he registers and back dates to the date he started charging. If HMRC were to carry out a visit on anyone he has charged VAT to they would soon see he has never registered and the penalty could be far more severe than if he voluntarily registers.

RAS

Have you discussed the VAT matter with the client? Was his intention to register for VAT, otherwise it does sound like VAT fraud. As mentioned, does appear that he will need to back date his VAT registration, there could well be penalties involved for such a late registration. If you are relatively inexperienced it might be easier not to act for the client.

SS83

Thanks for your replies

My theory with getting the company to pay a rent for usage of the equipment was to reduce the company's corporation tax bill as the rent would be an expense and also to allow the director a way of drawing additional funds from the company tax free?

I totally agree that the VAT situation is a mess! The director set up the company just over a year ago and has never had any professional advice until this point so I don't think he fully understood how registration etc worked. I will have a chat with him about getting the registration back dated and getting the late VAT returns filed straight away

MarieNoelle

Just wanted to add that if your client is allowed to charge rent for use of equipment to his company, this is income he will have to disclose on his self assessment, unless he can offset enough cost to make a 0 profit out of it.

groundy

SS83 as Marie says, the rental will reduce CT but incur SA tax therefore a pointless exercise.

stevo5678

He should introduce the assets into the business then he can claim costs and make a tax saving (there will be no income tax or CGT). This happens all the time.

Unless for some reason he wants to own them personally?

wbauk2002

Sell the assets to the business and make the most of your capital gains allowance and annual investment allowance, that will take money out the business tax free, but must be true value of the assets, not a stupid amount

deanshepherd

groundy wrote: »

SS83 as Marie says, the rental will reduce CT but incur SA tax therefore a pointless exercise.

Unless of course he has spare personal allowances to use up (very likely given the difference between NI threshold and tax threshold this year).

Conceivably he could rent the equipment in perpetuity meaning the tax relief on the rent could potentially outweigh the capital allowances on MV or cost.

Hardly a pointless exercise and worth running the numbers to see if it is beneficial.