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May Questions and Answers

Newsletter issue - May 2022

Q. I am the director of my own company incorporated 15 months ago. The business has expanded such that I have taken on a bookkeeper. Whilst preparing the information required to give to my accountant at the year-end, my new bookkeeper has found a batch of sales invoices that I issued soon after registration but inadvertently did not include VAT. Can I now issue additional invoices to correct the VAT error?

A: Mistakes happen and this scenario is not uncommon such that HMRC has a set procedure for dealing with such circumstances. The invoice you give to your customers must state if it is inclusive or exclusive of VAT. Legally this means that if your invoice does not show VAT then you cannot later demand payment from the customer. Therefore, if you fail to charge or charge the wrong amount of VAT, you are liable to make up the shortfall. Any shortfall of VAT must be declared on the return for the period in which the error is discovered. If the total amount for all errors is less than £10,000, or less than £50,000, and 1% of the outputs figure (Box 6 on the VAT return), the correction is made by including an adjustment on the next VAT return. If the amount is more, notification is via completion of form VAT652.

Whether you can recover any of this underpayment from your customer will probably depend upon the goodwill of that customer and their own VAT registration status. Should your customer be VAT registered they may be willing to make the payment as they may not be worse off if payment is made. A non-VAT registered customer will have an extra bill to pay although they may be able to deduct that payment from their profit for tax purposes if they are in business.

Q. In 2020 I entered into an agreement to purchase the leasehold of a commercial property that was under construction in exchange for a premium of £500,000. The agreement stated that a 20% deposit was to be paid plus a 10% stage payment 12 months later with the balance on completion. Unfortunately, my business folded due to Covid and I defaulted on the later stage payment. This was deemed a breach of the agreement, the contract was never completed and the builder kept the deposit.Can I claim a capital tax loss in respect of the lost deposit?

A: Unfortunately not - a capital loss can only be claimed where there is a disposal, or deemed disposal, of a chargeable asset. In this case, the terms of the contract were not adhered to, so you could not take possession of the underlying asset so no loss can be claimed.

Q. I live within walkable distance of a train station with a direct route into London. I work locally and drive to work so the drive is not used in the daytime. What are the tax implications if I rent out the drive?

A: Under the Property Tax Allowance rules, if total income from letting out the drive is less than £1,000 in the tax year, the whole amount is tax-free and does not need to be reported to HMRC.

Where property income exceeds £1,000 in the tax year, you have one of two choices - either:

  1. deduct the £1,000 allowance from the receipts and pay tax on the excess; or
  2. work out the profit or loss in the normal way.

The option as to which is the more beneficial will depend on the level of the expenses.

If receipts exceed expenses, but expenses are less than £1,000, the best result is to claim the property allowance and pay tax to the extent that income exceeds £1,000. If expenses are more than £1,000, the best result will be obtained by working out the profit in the usual way, deducting allowable expenses from receipts.