Tax Question

packmanuk_2

I have a question about my tax. The tax office is looking at my records from 05/06. Everything seems ok with the information I sent to them except 1 thing.

I run a tennis academy at a private school and rent the courts and clubhouse direct from the school.

In 05 I had cricket nets added to the indoor tennis court. Even though I paid for the nets they together with the indoor court remained the property of the school. I was given a rent decrease over 5 years to cover my outlay.

I have claimed tax relief on the £10,000 paid out on the nets.

However the tax office seems to think that I should only claim 50% of the £10,000 because it should come under capital allowances.

Is this correct ?

I would of thought that as I don't actually own the equipment I should get normal tax relief on my 10,000.

Any help on this matter would be great.

Cook_County

If I understand correctly you paid £10,000 to buy the nets & immediately disposed of them in return for the right to a reduction in future rent. This sounds as if you have effectively paid part of the 5 years rent in advance by way of a lease premium for use of the facilities (you paid in goods not cash but that is irrelevant to what happened).

You need to be asking therefore what tax relief your business can get for a lease premium. This would not be a capital allowance because you did not acquire capital but effectively acquired a right by payment of a premium.

packmanuk_2

I paid £10,000 for the nets. I was then given £2000 a year off of my rent for 5 years to cover this cost.

The reason it was done this way was because the nets could not be removed and I don't own the building only rent it. So the nets remained the property of the school.

So what tax relief should I get on the £10,000 ?

Cook_County

I'd take a look at what HMRC say about lease premiums paid here and then come back with further questions:

http://www.hmrc.gov.uk/manuals/pimmanual/PIM2330.htm

princeraymond

From what you say it would appear that given you have not taken title to the nets what you have in effect done is either 1) make the school a £10,000 interest free loan which they are repaying by reducing the rent over the next 5 years, or 2) made an advance payment of rent which is then being offset by lower future rent.

1) is for tax purposes a nothing, and whilst you can claim no deduction for the £10,000, you should continue claiming relief at the higher normal rent figure. 2) would mean you claim for the whole £10,000 now but claim lower rent over the 5 years.

Both come back to the same thing except 2) gives a beneficial timing difference, provided you can take benefit for the larger current deduction. If you can't take benefit from the larger current deduction try option 1).

It's not a capital allowances item though.

CLAPTON

in correct post
please ignore

Cook_County

I don't think Prince Raymond is quite correct. You'd have to start from GAAP which would require amortisation of any capital cost.

He is correct that you have not discounted the £10,000 cost but then you have paid a £10,000 advance for use of the facilities (effectively a premium) of £10,000 on day 1. I assume the school treated this as a lease premium received of £10,000 in their accounts.

It might also help to look at the contractural arrangements to see precisely what was agreed. There is no straightforward answer so you may need professional advice.

I do not believe that the HMRC inspector is correct either.

princeraymond

What the school perhaps should do is capitalise the nets and set up an equal and opposite creditor of the 10k.

It should then reduce the creditor by debiting the loan account and taking an equal and opposite credit to its rent account so that the rent credited to its P&L (or I&E) account is what it would have been if it hadn't given the rent 'discount'.

This treatment is entirely consistent with the possible treatments I posted earlier.

As there is no mention of any connection with the underlying right to rent or occupy the premises I think it is not a lease premium. Of course you are correct though that the underlying documents, if any, may change the answer. Currently though I think my earlier post is the best guess as to answering the original question, but I would wouldn't I...