Hyssop Ltd wishes to provide assistance with home to work travel costs for Corin, who is an employee, and also requires advice on the corporation tax implications of the purchase of a short lease and the value added tax (VAT) implications of the sale of a warehouse.
Hyssop Ltd:
– Is a UK resident trading company.
– Prepares accounts to 31 December each year.
– Pays corporation tax at the small profits rate.
– Is registered for VAT.
– Leased a factory on 1 February 2015.
Corin:
– Is resident and domiciled in the UK.
– Is an employee of Hyssop Ltd, who works only at the company’s head office.
– Earns an annual salary of £55,000 from Hyssop Ltd and has no other source of income.
Hyssop Ltd – assistance with home to work travel costs:
– Hyssop Ltd is considering two alternatives to provide assistance with Corin’s home to work travel costs.
Alternative 1 – provision of a motorcycle:
– Hyssop Ltd will provide Corin with a leased motorcycle for travelling from home to work.
– Provision of the leased motorcycle, including fuel, will cost Hyssop Ltd £3,160 per annum. This will give rise to an annual taxable benefit of £3,160 for Corin.
– Corin will incur no additional travel or parking costs in respect of his home to work travel.
Alternative 2 – payment towards the cost of driving and provision of parking place:
– Hyssop Ltd will reimburse Corin for the cost of driving his own car to work up to an amount of £2,240 each year.
– Corin estimates that his annual cost for driving from home to work is £2,820
– Additionally, Hyssop Ltd will pay AB Parking Ltd £920 per year for a car parking space for Corin near the head office.
Acquisition of a factory:
– Hyssop Ltd acquired a 40-year lease on a factory on 1 February 2015 for which it paid a premium of £260,000.
– The factory is used in Hyssop Ltd’s trade.
Disposal of a warehouse:
– Hyssop Ltd has agreed to sell a warehouse on 31 December 2015 for £315,000, which will give rise to a chargeable gain of £16,520.
– Hyssop Ltd had purchased the warehouse when it was newly constructed on 1 January 2012 for £270,000 (excluding VAT).
– The warehouse was used by Hyssop Ltd in its trade until 31 December 2014, since when it has been rented to an unconnected party.
– Until 1 January 2015, Hyssop Ltd made only standard-rated supplies for VAT purposes.
– Hyssop Ltd has not opted to tax the warehouse for VAT purposes.
– The capital goods scheme for VAT applies to the warehouse.
Required:
Note: You should ignore value added tax (VAT) for parts (a) and (b).
Explain, with the aid of calculations, which of the two alternatives for providing financial assistance for home to work travel is most cost efficient for:
(i) Corin.
(ii) Hyssop Ltd.
Hyssop Ltd
Assistance with home to work travel costs for Corin
(i) Cost to Corin
Alternative 1 – Provision of a motorcycle
Corin is a higher rate taxpayer, so will pay income tax at 40% on the annual taxable benefit. This will be £1,264 (£3,160 x 40%).
Corin will have no national insurance liability in respect of this benefit, so the total cost to him is £1,264.
Alternative 2 – Payment towards the cost of driving and provision of parking place
Provision of a parking place at or near an employee’s normal place of work is an exempt benefit for income tax
Corin will pay income tax at 40% on the cash received as reimbursement of his driving costs, together with Class 1 national insurance contributions at 2%. This will give rise to a total tax cost of £941 (£2,240 x 42%).
The additional driving costs not reimbursed are £580 (£2,820 – £2,240). The total cost to Corin of this option is therefore £1,521 (£941 + £580).
The most cost efficient option for Corin is therefore provision of the motorcycle.
Tutorial note: The statutory mileage rates are not relevant in this case as the driving costs are not related to journeys made in the course of Corin carrying out his duties of employment.
(ii) Cost to Hyssop Ltd
Alternative 1 – Provision of a motorcycle
Hyssop Ltd will have to pay Class 1A national insurance contributions of £436 (£3,160 x 13·8%) in respect of the provision of the motorcycle. The total cost to Hyssop Ltd is therefore £3,596 (£3,160 + £436).
Alternative 2 – Payment towards the cost of driving and provision of parking place
As the provision of the parking place is an exempt benefit for income tax, there will be no Class 1A liability for Hyssop Ltd.
Hyssop Ltd will have a Class 1 national insurance liability in respect of the reimbursement of driving costs. This will be £309 (£2,240 x 13·8%).
The total cost to Hyssop Ltd is therefore £3,469 (£2,240 + £309 + £920).
The most cost efficient option for Hyssop Ltd is therefore the payment towards the cost of driving and provision of the parking place.
Hyssop Ltd will be able to deduct all the costs for corporation tax purposes under both options.
Tutorial note: As the amounts are deductible for corporation tax purposes under both options, there is no need to calculate the after-tax cost to Hyssop Ltd.
Explain, with the aid of calculations, the corporation tax implications for Hyssop Ltd of the acquisition of the leasehold premises on 1 February 2015, in relation to the company’s tax adjusted trading profits for the year ended 31 December 2015 and its ability to roll over the gain on the sale of the warehouse.
Corporation tax implications of the acquisition of the 40-year lease
As Hyssop Ltd has paid a premium on the grant of a short lease on a property which is going to be used in its trade, a deduction is available for each year of the lease in calculating Hyssop Ltd’s taxable trading income.
Explain, with the aid of calculations, the VAT implications of the disposal of the warehouse on 31 December 2015.
Value added tax (VAT) implications of the disposal of the warehouse
At the date of sale, the warehouse is more than three years old. Accordingly, because Hyssop Ltd has not opted to tax it, the disposal will be exempt from VAT.
As the warehouse was newly constructed when it was purchased, VAT of £54,000 (£270,000 x 20%) would have been charged and, as the warehouse was used in its standard-rated business, this would have been wholly reclaimed by Hyssop Ltd in the year ended 31 December 2012.
As the disposal is exempt from VAT, VAT will have to be repaid to HM Revenue and Customs (HMRC) as the warehouse is deemed to have 0% taxable use for the remainder of the ten-year adjustment period under the capital goods scheme. The amount of £32,400 (£54,000 x 6/10 x (100% – 0%)) will be repayable to HMRC as a result of the disposal.
Tutorial note: A further £5,400 (£54,000 x 1/10 x (100% – 0%)) will also be repayable to HMRC in respect of the year ending 31 December 2015 as the warehouse has been rented out throughout this year, with no option to tax.