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March Questions and Answers

Q1. After several years of successive growth, my wife and I have decided to incorporate our partnership. We have a number of assets used in the trade for which we have claimed relief using the annual investment allowance. As the trade is being effectively disposed of to the new company, do we have a problem with capital allowances?

A: You are correct to be concerned. As you and your wife will be connected to the company, the default position is that assets are deemed to transfer at market value. If the AIA has been claimed, a balancing charge can arise under the capital allowances regime. Note, this is not a CGT issue as incorporation relief should be available as long as the trade is being transferred wholesale.

In order to prevent a charge arising in this situation, you can make a claim under section 266 CAA 2001. This treats the assets is transferred at their written down value, i.e. nil where the AIA has relieved the cost in full. You need to make the claim jointly with the new company, and in writing within two years of the date of the transfer.

Q2. In the wake of COVID-19 pandemic, I have been reviewing my company’s books in an effort to more accurately review unpaid sales invoices. I have identified a relatively high number of these from the end of 2021, as may be expected in the circumstances. Am I right in thinking I have to wait six months before I can write these off for tax purposes?

A: The six-month statutory time limit actually applies to VAT, rather than corporation tax. There is no minimum time you need to wait before you can write off a debt for tax purposes in theory. However, HMRC does require reasonable steps to have been taken in order to recover payment before you do so. It is not sufficient to make a provision for bad debts, as it is under accounting rules. In practice, you need to identify debts that are unlikely to be paid on a case-by-case basis.

For smaller debts, HMRC is likely to accept a couple of reminders to demonstrate that you have made an effort to recover the monies owed to you. For larger debts, it’s more likely that more formal action would be needed in order to secure the deduction, e.g. appointing a debt collection service, or applying to a court to assist with recovery. There are no hard and fast rules, although HMRC is likely to accept a claim for bad debt relief if you have evidence that a debtor is in administration, or subject to insolvency proceedings. HMRC’s guidance in the business income manual is a helpful reference.

Q3. Our business has been struggling with VAT compliance for a number of years. Admittedly, this has largely been down to us, particularly the misconduct of a former employee who was responsible for the reporting (they have been dismissed as a result) but we are keen to put things right and have employed the services of a local accountant who will be dealing with things for us going forwards. However, I have now received a letter from HMRC saying that they will be issuing a demand for security payment in respect of VAT liability. As I understand it, this will not be offset against future liabilities, and instead will be refunded after a period of good compliance. My issue is that this will not be easy to fund. Can I refuse on the grounds that the company has already appointed an agent, which will mean vastly improved compliance going forward?

A: HMRC does have the power to ask the security in respect of certain taxes perceives there is a risk to the public revenue. Whatever you do, do not ignore a notice when it comes through – failure to pay it within the statutory time frame makes it a criminal offence to continue to trade. As you have clearly made a commitment to improving your compliance, it may be worth sending a copy of your engagement letter with the new accountant and asking for an internal review emphasising your commitment. Also stress that the employee responsible for the previous problems has been removed. There is no guarantee that this will remove the requirement for security, but you really have nothing to lose.

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