Other property announcements

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1 Property Summer Budget 2015 Meet our new Director of VAT and Duty Bridging the skills gap - The Reading Real Estate Foundation Land Remediation Relief Kent Property Market Report Energy Savings Opportunity Scheme (ESOS) Are you ready? The Kreston Reeves newsletter designed to help keep you up to date with developments affecting the Property and Construction sector August 2015

2 1 Summer Budget 2015 Wednesday 8th July saw Chancellor George Osborne unveil his Summer Budget, the first Conservative budget since The overriding key message of his delivery was one of moving Britain from a low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country that we intend to create. There were a number of announcements in this budget which will provide benefit and opportunity to the property and construction sector, some of which were widely anticipated such as a change to the Annual Investment Allowance. Taxation changes and further measures introduced In support of his key message which was of business investment and development, the Chancellor kept to his word when it came to revising the Annual Investment Allowance for businesses. Previously expected to be reduced from 500,000 to 25,000 by the end of the year, it was announced that the relief would instead be lowered and capped at 200,000 per annum from January This is fantastic news for businesses and will provide a vital stimulus for business investment. In the previous budget it was announced that the rate of corporation tax was going to be a flat 20% for almost all companies, regardless of whether you were a small owner managed business or a large corporate entity. The chancellor continued in this vein by announcing that the rate of corporation tax would be further reduced in the coming years from 20% to 19% in 2017 and then 18% in This will provide great savings to the property and construction sector, allowing businesses to reinvest more of their profits into their business and assisting growth. The government has introduced a new National Living Wage, for those over 25 years of age, which will come into force in April 2016 and will start at 7.20 and rise to 9.00 by the year This will be welcomed by employees within the sector as the basic cost of living continues to rise. For employers however, the government has, in part, counteracted this increase in National Wage by increasing the relief given to employers via the Employment Allowance. There will be a 50% increase in allowance from 2,000 to 3,000 starting April 2016, this allowance is a vital cash flow relief currently welcomed by many small businesses. Other property announcements The property sector has seen a rapid rise in the number of new buy to let mortgages being taken out, aided perhaps by the pension reforms from 6 April 2015 which saw those over the age of 55 able to withdraw a lump sum from their pension pot to invest however they wish, perhaps in a second property. This rise in the number of buy to let properties has seen a surge in the property rental market and in his budget, the Chancellor announced a change to the way in which interest on buy to let mortgages will be taxed. Previously, the landlord could offset any mortgage interest paid on a buy to let property against the rental income received. The Chancellor has now announced that this relief will be restricted to basic rate of income tax meaning that relief will not be obtained at a higher rate. This is due to be introduced over four years from April 2017 but will not apply to Furnished Holiday Lets. Whilst this may be bad news for wealthier landlords, this new implementation may help to steady the buy to let market. Those landlords with a large portfolio of properties may wish to explore the consequences arising out of this and look into the possibility of incorporation, especially now with the Chancellor s announcement of a reduction in corporation tax rate. Also announced was an increase in the limit for the rent a room relief which will be increased from 4,250 to 7,500 per annum from 6 April A long overdue reform to inheritance tax (IHT) on the family home was finally announced. From April 2017, where the family home is passed on to direct descendants, an additional IHT family home allowance will be available, starting at 100,000 in April 2017 and rising to 175,000 by April When combined with the static IHT nil rate band of 325,000 per person, this will give spouses IHT collective relief of up to 1,000,000. There will be a tapered withdrawal of this additional family home allowance for estates with a net value of more than 2 million. For further information please speak with your usual Kreston Reeves adviser or contact Jennifer Williamson, Partner and Property and Construction specialist on +44 (0) or jennifer.williamson@krestonreeves.com

3 2 Meet our new Director of VAT and Duty We are delighted to announce our Property Sector team has been enhanced by the recruitment of Rupert Moyle, our new Director of VAT and Duty. Rupert has worked with a wide variety of owner managed businesses, large corporates and high net worth individuals. In addition to his general VAT knowledge Rupert has particular expertise in the property, international, charity/not-for-profit and education sectors. Speaking shortly after his appointment, Rupert said I am delighted to join the team here at Kreston Reeves and look forward to working with the firm s wide base of clients. Property issues invariably touch many aspects of business and personal life. With the sums involved, it is essential to get the right advice at the right time, with good forward planning the key to success. Current UK VAT legislation provides a basic rule that supplies of land are exempt from VAT, but there are a number of exceptions and an option to tax which can lead to VAT being charged at 20%. There is also the possibility that services can be charged at the reduced or zero-rates. Rupert is encountering some common themes at present in managing these exceptions and reliefs, which include: Commercial property The option to tax regime was implemented in 1989, enabling businesses to plan their VAT strategy in terms of gaining the ability to recover VAT on works undertaken, where ordinarily the VAT would be irrecoverable, but in having to account for VAT on rental and sales. With many properties built before 1989 and options lasting more than 20 years, it can sometimes prove difficult to establish whether a property is opted or not. This uncertainty can cause significant delay and cost if the building or the company operating therein is being bought, sold or a new tenant sought. Problems can also arise where a business finds its option to tax ineffective due to various anti- avoidance rules which can inadvertently catch supplies in relation to domestic and charitable properties for example, and even where the recipient of a supply is unable to recover most of its VAT. Rupert can provide imaginative solutions to manage these issues to arrive at the best outcome. Residential property Rupert has specialised in residential property advice since joining the profession 18 years ago. He cut his teeth with a Big 4 firm, working with very well known house builders and large housing associations undertaking substantial mixed developments. He became their national housing sector specialist and has continued to work with housing clients in subsequent roles. There are often reliefs from the ordinary VAT costs that can apply to housing developments, refurbishments and conversions. This applies to large as well as much smaller projects. Some reliefs are clear, such as the zero rate for constructing new homes, or the reduced rate for certain domestic conversions and dwellings unoccupied for two years. Other opportunities are less obvious, such as the ability to recover VAT on renovated properties unoccupied in the 10 years prior to sale. Savings can also be achieved using design and build structures if agreements are carefully worded. These effectively reduce the usual 20% VAT on professional fees to the (reduced or zero) rate of VAT applicable to the construction works. There really are lots of ways of mitigating VAT where businesses are involved in domestic property projects. Construction and conversion - schools, colleges and charities With house building high on the UK Government s agenda, there are a wide number of opportunities available to developers, big and small, to minimise the VAT cost of construction and conversion. Rupert s most recent large projects include advice on minimising the VAT exposure on the construction of new further education college buildings and also for school properties. He is currently involved in advising charities developing buildings and annexes. Such projects are often subject to VAT due to the growing business activities of charities. Refurbishments are also subject to VAT. Rupert assists clients with innovative special methods of VAT recovery and is experienced in successfully negotiating such methods with HMRC. We are yet more convinced from talking to Rupert that wherever property transactions and development works are concerned it really is advisable to check there are no bear traps awaiting, and that all reliefs and solutions have been identified to pay only the right amount of VAT. For further information please speak with your usual Kreston Reeves adviser or contact Rupert Moyle, Director of VAT and Duty on +44 (0) or rupert.moyle@krestonreeves.com

4 3 Reducing VAT - case studies FE College A further education college was redeveloping its campus, constructing a number of new buildings as well as making improvements to the façade of the property. The college understood that each new building would qualify for zero-rating on the works. It instructed us to review the project, to confirm the VAT treatment and that a relief was available. Some of the buildings were clearly new, separate from the campus buildings and fulfilling a new function for the college rather than to accommodate an enlargement of an existing activity. Students using those buildings were not fee paying and so the use would be nonbusiness. These, we advised, were zero-rated as relevant charitable use properties (the relief being for use by a charity for non-business purposes). Other facilities were not so straightforward in that they accommodated a proportion of adult students, some paying full fees, others part funded. Despite the potential to adopt an argument following the Wakefield case, i.e. that part funded students should be regarded as non-business, it still was not possible to fall under the 5% business use allowance to achieve the relief, no matter the methodology of use applied. A further property also fell foul of the various new building relief conditions. It would be attached to the existing campus, becoming part of a thoroughfare for students moving through the college. It also housed an administrative function and part would be let to third parties to operate student facilities. Although zero-rating was not available, we identified a solution to mitigate the substantial VAT cost. This option was to opt to tax on the building, rental income from commercial tenants becoming taxable rather than exempt. This solution then allowed for an application to HMRC to use a special method of recovery, isolating the building into its own sector, allowing VAT incurred to be recovered according to the floor area used for taxable purposes. This solution was more beneficial than the existing income based method with a recovery of under 5%. The floor area method would achieve around 35%, representing a substantial saving. Property developer converting a mixed use property A developer converted a mixed commercial and residential property into a number of flats. Each apartment on completion would be a separate dwelling and would be sold on long leases (in excess of 21 years for VAT purposes). Its building contractor had advised that VAT at 20% would be due on the works as the building was not new. The property before works started consisted of commercial areas on the ground floor, with storage on the first and flats on the second floor. Our analysis was that the ground and first floor conversion, from non-residential to flats and the change in number of dwellings on the second floor - from two to three - qualified for the reduced rate of 5% VAT. There was some debate about the first floor in that these areas may have been dwellings at some point in the past. In any event, these qualified for 5% treatment as they had definitely been unoccupied for more than two years. Hence each part of the existing structure qualified for a 5% relief. The interesting part of the development was the extension to the rear of the property and creation of a new top floor to the property. Zerorating was available for the creation of new dwellings not in the space previously occupied by existing dwellings. It was found that although part of the new top floor flats did sit where roof areas had been, the roof space did not appear to have been part of, or available for use by, the second floor flats. HMRC therefore accepted that the third floor flats could be zero-rated. In addition to the zero-rating for new flats, the developer was also able to benefit from zero-rating on the first grant of the major interest in the extended area flats, hence was able to recover VAT as well. We also advised on a design and build structure to mitigate in part the 20% VAT burden on professional fees for the project.

5 4 Bridging the skills gap - The Reading Real Estate Foundation Reading Real Estate Foundation (RREF) supports Real Estate education and research at Henley Business School, University of Reading, in order to help students achieve their full potential - but it has a huge impact far beyond the University Campus. Their supporters believe in creating the best possible opportunities for students so that they can go on to do great things in the industry. Founded in 2002 by a group of pioneering alumni, led by Professor Andrew Baum, RREF is a unique and forward-thinking educational charity. From the beginning it was their aim to create a community of professionals and academics who work together to provide financial aid, nurture talent, champion excellence, raise awareness and further best practice in the industry. These aims formed the basis of RREF s foundation and remain their guiding principles today. Thanks to the exceptional contributions of their supporters, they have been able to run many initiatives that have exceeded their ambitions. They have awarded thousands of pounds in bursaries; launched professional development and mentoring schemes; run an annual Careers Fair; and organised highprofile events for students, alumni and the wider industry. Their most recent initiative Pathways to Property is committed to widening access to the Real Estate profession and raising awareness of the many careers that the industry offers. Supported by British Land and The Sutton Trust, the programme is targeted at academically able Year 12 students in UK state schools and colleges and culminates in 100 successful applicants joining them for a 3 day residential summer school at the University of Reading. This diverse activity has earned RREF an enviable reputation as a leading edge educational charity that is unique in the industry; enabled them to build a robust and vibrant network of professionals that reaches far beyond Reading alumni; and most importantly, helped thousands of students secure leading roles in the real estate sector. To continue to be successful they rely on the support of their extensive network of contacts within the industry. From those attending events, and taking corporate tables at their Annual Fundraising Dinner, to their primary donors, All of their supporters at every level are crucial to their success, and without them they couldn t plan for the future. To learn more about RREF and how you can get involved contact Kerry Johnston, Head of Supporter Engagement on k.johnston@rref.reading.ac.uk or call griggs@krestonreeves.

6 5 Land Remediation Relief Don t miss out if the tax relief is complicated or little known. We ve noticed a recent trend whereby companies are missing out on claiming legitimate tax relief because the reliefs are either little known, or complicated, or both! There has been much in the media over the last few years about the morality of tax planning, but failing to take advantage of tax reliefs in place to encourage expenditure for good public policy reasons cannot be part of this. Claiming relief for Research and Development, and Land Remediation Relief (LRR) are two such examples, in this article, Paul Roe, partner in our Gatwick office outlines what to look out for to claim LRR and what the benefits of a claim may be. If ever there were a question about tax reliefs on the popular TV show Pointless, I suspect LRR would indeed be a pointless answer, but it is far from being that. Provided they qualify, and give HMRC the right evidence, companies (only) can claim an enhancement of 150% on certain expenditure which puts land back into use, or makes buildings fit for use again. So what counts as remediation to qualify for LRR? Broadly: Land or buildings are contaminated if they contain anything, or are in such condition as would cause relevant harm such as death, significant injury or damage to living things, human or animal. It may not be immediately obvious from this definition, but clearing asbestos from buildings certainly falls within this definition, and is probably the one most often missed. Bringing derelict land back into productive use (other than simply by removing buildings or structures). Clearing contamination from land, (polluted water, arsenic, arsenical compounds, radon or Japanese Knotweed). All of which had been caused by a previous owner. Companies which have acquired land or buildings outright, or on a lease longer than seven years, for the purposes of its trade, may make a claim, but LRR will be blocked to the company which had originally caused the contamination. So, you ve acquired the right title in the land, and it is contaminated in some form that fits the definition above (and you ve not been responsible for the contamination!) what expenditure qualifies for the enhanced tax relief? As you would expect, this is defined too: Capital or revenue expenditure qualifies, provided it is recognisable as having been incurred as having the effect of preventing, minimising, remedying, containing or even only mitigating the effects of the relevant harm. So, as is often overlooked here, the remediation need not entirely solve any issue for the expenditure to qualify. The costs must have been incurred because of the contamination or dereliction and for no other reason. Materials, sub contractor costs and own company wages costs associated with the work can be included in a claim. The costs of making a claim for LRR exceed those for other tax reliefs, since it is vital that relevant experts are involved in the process. Indeed, we recommend that a detailed assessment is undertaken by such an expert, to include a specification of works required. This is not like claiming for Research and Development where a more or less standard format report is needed for HMRC; to be successful in an LRR claim, a detailed bundle of evidence highly specific to that claim is required, and often some liaison is required with HMRC - who are not experts in the field. Once you ve ticked all the qualification boxes, there are two methods in which relief could be taken: (1) As noted above, you can claim 150% of the qualifying expenditure, in effect gaining 30% tax saved on the amount spent, or, (2) If you re in loss that year, you can swap the enhanced loss relief carried forward for a reduced amount of cash payment from HMRC, (spend x 150% x 16%). As this equates to 24% of the spend, there will be a decision to make, trading off lower cash sooner for greater relief against future profits. The team at Kreston Reeves have significant experience in making successful claims on behalf of clients. We d be delighted to discuss or report on specific projects, please contact either Paul Roe or David Noakes at our Gatwick office on , or discuss it with your usual Kreston Reeves adviser.

7 6 Kent Property Market Report Kreston Reeves is delighted to announce we will be sponsoring the 2015 Kent Property Market Report, alongside Caxtons and Locate in Kent. This year marks the 24th Edition of the Report, the annual guide to investment and development in Kent, which will be launched on 5 November The report s launch will be a great opportunity to hear the latest views from some of the region s foremost property professionals, with plenty of chances to meet with like-minded people in the sector. We hope to see you there. You can obtain a copy of the 2014 Report at Energy Savings Opportunity Scheme (ESOS) - Are you ready? In response to the EU Energy Efficiency Directive, the UK Government established ESOS in The scheme requires that qualifying organisations carry out an Energy Assessment every four years, reporting compliance with the ESOS regulations to the Environment Agency. The assessment comprises an audit of the energy used by UK businesses in their buildings, processes and transport to identify cost-effective energy saving measures. The deadline for first notification under the scheme is 5 December Penalties may apply for non-compliance. At present, ESOS qualification is aimed large businesses, as defined below: Is registered in the UK and employs at least 250 people; or Is registered in the UK and has an annual turnover above 50 million ( 38.9m) and an annual balance sheet total above 43 million ( 33.4m); or Is an overseas company with a UK registered establishment which has 250 or more UK employees (paying income tax in the UK) If your organisation is part of a group, you will need to aggregate the criteria measurements of all of your group s UK businesses. If your organisation does not qualify, then no action is required. For full ESOS guidance and further information:

8 Calling all tweeters! About Kreston Reeves To keep up to date with important developments in the Property and Construction sector, please follow us on Contact us Kreston Reeves is a leading accountancy and financial services firm located across London and the South East of England. We provide a full range of accountancy, business advisory and financial services that help our UK and international clients achieve their personal and business goals, with peace of mind. For more information visit our website: For further information please contact a member of our team to find out how we can help you on +44 (0) Alternatively please speak with Michael Cook, Partner and Head of Property and Construction on +44 (0) or michael.cook@krestonreeves.com Kreston Reeves LLP (the Firm) is a Limited Liability Partnership registered in England and Wales with registered number OC Registered office: 37 St Margaret s Street, Canterbury, Kent CT1 2TU. Registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Details about our audit registration can be viewed at for the UK and for Ireland, under reference number C A member of Kreston International A global network of independent accounting firms. Kreston Reeves Financial Planning Limited, which is wholly owned by the Firm, is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales with registered number Registered office: 37 St Margaret s Street, Canterbury, Kent CT1 2TU. Kreston Reeves Corporate Finance LLP is a Limited Liability Partnership registered in England and Wales with registered number OC Registered office: 37 St Margaret s Street, Canterbury, Kent CT1 2TU. Kreston Reeves Corporate Finance LLP is authorised and regulated by the Financial Conduct Authority.