If you are considering a major property acquisition or refurbishment you may find the following notes useful.

One of the main aims of VAT planning is to minimise situations where VAT paid by your business cannot be reclaimed as input tax on your VAT returns. The other area of interest is ensuring your builder charges the correct rate of VAT.

Ask your builder to separate his charges for different types of work. For instance:

• Construction work creating new dwellings is zero rated.
• Refurbishing retail or other commercial property is generally standard rated.
• Refurbishing existing residential property is standard rated.

There are situations where a conversion from a non-residential to residential use can be charged at a reduced rate of 5% VAT.

Option to tax.

You can opt for a particular property (non-residential part only) to be subject to VAT. What this means is that any input tax attributable to that non-residential property can be reclaimed. It also means you will need to charge VAT at the standard rate on any rents you charge. If you do opt to tax you will then be able to recover any input tax paid relevant to the non-residential property – building costs etc.

When you sell a non-residential property that has a valid option to tax; in certain circumstances you will have to add VAT to the sale proceeds.

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If you are in business you may find your income somewhat reduced as we move into recession. You may also artificially reduce your income by investing in equipment or other assets that allow you to write off the investment against your earnings.

In both cases this may give rise to a reduced level of earnings, perhaps for just one year that would allow you to make a claim for tax credits.

Tax credits fall into two classes. Working Tax Credits (WTC) and Child Tax Credits (CTC).

As you would expect the conditions for eligibility are complicated. Essentially if your income is below certain minimum levels, you are 16 years or over and you are resident in the UK, and all the other detailed conditions are met, you can make a claim.

To make a claim for a full tax year you must submit your application before the 5 July. (A three month carry back is allowed.)

A particular problem arises for working directors of small companies. As long as there is no formal contract of employment, directors are not obliged to pay themselves remuneration that complies with the National Minimum Wage regulations. In this way they can justify taking low levels of salary from their company. Unfortunately if you don’t have a contract of employment you are not considered to be employed for WTC purposes – so no claim is possible.

If therefore you consider your net earnings will be reduced, for whatever reason, you may be advised to make an application for tax credits.

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Many UK share investors will have picked up shareholdings in Spanish companies in recent years. The most common example is Banco Santander who have acquired a number of UK building societies. (Abbey National 2004, the Alliance & Leicester, and more recently they have bid to acquire parts of Bradford & Bingley.)

If you hold Santander shares, dividends you receive after 5 April 2008 now benefit from the same 10% notional tax credit as UK shares. For basic rate tax payers there is no real change.

But what happens if you sell your Spanish shares?

Capital Gains Tax

Many UK holders of Santander shares will have paid nothing for the shares as they were acquired when the underlying UK building societies were demutualised many years ago. Subject to the usual rules your disposal may or may not create a capital gains tax liability in the UK.

What many shareholders may not realise is that they also have a legal obligation to file a tax form in Spain.

The completed Form 210 and certificate of UK tax residence must be delivered in person to the Spanish tax authorities, generally in Madrid.  This means that shareholders will normally have to engage the services of a Spanish tax representative in order to have the documents filed.
Form 210 must be filed within 30 calendar days of the date of the sale or gift. The failure to file the form will give rise to a penalty of approximately (Euro) €100, even if there is no tax to pay. This penalty may increase to approximately €200 if the form is not filed before the Spanish tax authorities have raised a demand.

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