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Interesting tax questions...and solutions

Q. A client is a landlord of a commercial premises and the tenant has a break clause. One of the break conditions is that the tenant must pay £10,000 to the landlord when serving their break notice. That £10,000 is expressly stated to be exclusive of VAT.

The property is elected for VAT and the landlord charges VAT on rent.

Is that break premium liable to VAT?

A. Broadly, whether VAT is chargeable depends on whether or not a break clause was included in the original lease. If it was, then the exercise of the break is not a supply for VAT.

However, if the right to break was not pre-existing, then there will be a supply on which VAT is chargeable.

Q. Does the failure to pay council tax separately for an annexe mean that it cannot be a separate dwelling for multiple dwellings relief purposes?

A. When a main house is being bought with an annexe, in order to determine whether or not the annexe is a dwelling, a holistic approach is required. HMRC manuals state:

"In considering whether or not a property includes one or more dwellings (and if so, how many) a wide range of factors come into consideration. No single factor is likely to be determinative by itself. However, not all factors are of equal weight either, and one strong factor can outweigh several weaker contrary indicators. Where a number of contrasting indicators exist, it may be necessary to weigh up the factors to come to a balanced judgement."

"The acquisition of a property with an annexe qualifies for MDR provided that the property and the annexe are two separate dwellings. While this will depend on the precise facts and circumstances of each case, a separate dwelling would generally be expected to have its own entrance, kitchen and bathroom.

For example, in Fiander and another v HMRC [2020] UKFTT 190 (TC), the First-tier Tribunal held, on the facts, that an annexe was not a separate dwelling to the main house because the lack of a door separating the two meant that there was insufficient privacy and security.

In Merchant and another v HMRC [2020] UKFTT 0299 (TC), the First-tier Tribunal held that a basement annexe that was accessible via a common front door and hallway but by a separate staircase was not a separate dwelling for the purposes of MDR. It was not clear in this case whether or not both the annexe and the main house had their own individual lockable doors."

With specific reference to council tax, HMRC manuals state:

"Council Tax – Where a property has been assessed for council tax purpose as comprising more than one dwelling, this is an indicator that for SDLT purposes there also may be more than one dwelling. However, the definition of dwelling for council tax purposes is different from that of Stamp Duty Land Tax, and hence this factor will not be a strong indicator on its own."

Q. Can a qualifying EIS investment be made via a limited liability partnership?

A. The EIS regime is designed to provide UK tax relief for individual investors. Such an investor must beneficially own shares in a qualifying company to obtain EIS reliefs.

On that basis, investment via a company, for example, would not ordinarily qualify.

In the case of an LLP, the manner in which it holds its assets is likely to be the issue that HMRC object to which may deny EIS reliefs to its members.

CGT legislation gives tax transparency for LLPs carrying on a trade or business with a view to profit. Accordingly, for capital gains tax (CGT) purposes, each partner is regarded as owning a share in every partnership asset, and any disposal of assets by the LLP is treated as disposal by the partners.

For Income Tax purposes, the legislation states:

  • An individual is eligible for EIS relief in respect of an amount subscribed by the investor on the investor's own behalf for an issue of shares in a company if–

  • the shares are issued to the investor.

Given the requirement above and the manner in which a member in an LLP is treated as owning fractional interests in every partnership asset, that would appear to be an argument in favour of the relevant conditions not being satisfied in the case of an investment by a member via the LLP .

However, "joint subscriptions" are allowed within the legislation by exception, and this seems to provide a basis for EIS investments to be possible via an LLP, given the manner in which the shares would be treated as being held as described above.

The above position is one that HMRC have specifically ruled out by stating:

"Note that the exception does not go far enough to enable investors to obtain income tax relief if they invest in a partnership, which in turn invests in shares (including a limited partnership and a limited liability partnership). This is because rather than having individual ownership of the shares, the individual will instead own a proportion of all the assets, including shares, owned by the partnership (as will all the other partners in the partnership)."