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bigduckontax
bigduckontax, Accountant
Category: UK Tax
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Limited company incorporated in Scotland with the following

Customer Question

Good Morning,Limited company incorporated in Scotland with the following business activities:
Primary - Other letting & operating of own or lease real estate
Other - Accounting/audit servicesThe director introduced a property (in Scotland) in 2015 and has been renovating it ready to be let out. The company is the legal owner, but the property was purchased in full by the director. The value of the property will be held in the directors loan account. (they have currently set it up as £130k for one share but I have advised we process a special resolution to move this to DLA).
The sole director of the company also worked through a recruitment company for around 6 months doing accountancy work. The contract was in the name of the limited company, not the director.The fees for the accountancy work has been paid gross into the clients business account and they have been using this revenue to pay for the refurb of the property.The company was set up in 2015 and the year end is 30th June 2016.So far no rental income has been received only expenses. Can the income from the short contract be used to offset the losses that will undoubtedly arise from the refurb of the property, or can the losses generated only be carry forward to next years profits and corp tax will be due on the income from the short service contract?Any advice that you can offer regarding this whole scenario would be really helpful. I think I know the answers but I am doubting myself so would like some reassurance.
Many thanks
Submitted: 9 months ago.
Category: UK Tax
Customer: replied 9 months ago.
Good Morning,Limited company incorporated in Scotland with the following business activities:
Primary - Other letting & operating of own or lease real estate
Other - Accounting/audit servicesThe director introduced a property (in Scotland) in 2015 and has been renovating it ready to be letout. The company is the legal owner, but the property was purchased in full by the director. The value of the property will be held in the directors loan account. (they have currently set it up as £130k for one share but I have advised we process a special resolution to move this to DLA).
The sole director of the company also worked through a recruitment company for around 6 months doing accountancy work. The contract was in the name of the limited company, not the director.The fees for the accountancy work has been paid gross into the clients business account and they have been using this revenue to pay for the refurb of the property.The company was set up in 2015 and the year end is 30th June 2016.So far no rental income has been received only expenses. Can the income from the short contract be used to offset the losses that will undoubtedly arise from the refurb of the property, or can the losses generated only be carry forward to next years profits and corp tax will be due on the income from the short service contract?Any advice that you can offer regarding this whole scenario would be really helpful. I think I know the answers but I am doubting myself so would like some reassurance.
Many thanks
Expert:  bigduckontax replied 9 months ago.

Hello, I am Keith, one of the experts on Just Answer, and pleased to be able to help you with your question.

Company's income less expenses will generate a profit or a loss for Corporation Tax (CT) purposes. CT is at a flat rate of 20% on any surplus. The short contract income can be used to offset losses elsewhere in the company and those net losses can be carried forward indefinitely until absorbed.

I am slightly worried by your statement viz:

'The company is the legal owner, but the property was purchased in full by the director. '

If the director purchased it then it cannot be the company's. However, what I think you mean, and from the tenor of your question, is that the company bought it with moneys loaned by the director, hence the creation of a DLA. If the director did own it then there is a danger that on ultimate disposal he/she would be liable to capital Gains Tax (CGT). Companies are not subject to CGT, all such gains or losses are passed through the company's trading account.

I do hope that I have been able to clear the air for you in this matter.

Customer: replied 9 months ago.
it does not matter that the loses arise from a different trade? Rental losses can be offset against income received for working on behalf of a third party as a book keeper?
Expert:  bigduckontax replied 9 months ago.

No, it is all within the company's trading activity. Here is the Gov UK web site advice on the subject:

'Your company or organisation might earn property income if, for example, it rents out business or other premises. Separate rules apply to losses on property income. These losses:

  • must be offset against other profits in the same accounting period
  • can’t be carried back to be offset against profits from earlier accounting periods
  • must be offset against other profits in the next accounting period if it can’t be used in the same period and hasn’t been used as group relief, as long as the property business is still being carried on in that accounting period'

Remember, any remuneration paid to a director must be made through PAYE channels as a director is an employee per se.