Tax/VAT Advice

theaviator

I am looking into starting a new business building & selling houses. The accountant I went to scared me off a bit though when she mentioned the profit after VAT.

Can I give you an example:

Site Cost: 70K
Cost of construciton: 130K (incl VAT)
Sell for 275K (incl VAT)
Accountant says that I will only come out with 20K profit after VAT/TAX etc. She says that I will not be able to get at the profit either as it is in the company. Is this the case as I am totally disillusioned.

Cheers !

Carb

theaviator wrote:

I am looking into starting a new business building & selling houses. The accountant I went to scared me off a bit though when she mentioned the profit after VAT.

Can I give you an example:

Site Cost: 70K
Cost of construciton: 130K (incl VAT)
Sell for 275K (incl VAT)
Accountant says that I will only come out with 20K profit after VAT/TAX etc. She says that I will not be able to get at the profit either as it is in the company. Is this the case as I am totally disillusioned.

Cheers !

Christ, I really must start looking for my own clients if some accountants can make money giving advice like that.

As VAT is not a cost to you I'll take the VAT element out of your figures.

Site Cost Net: 70K
Construction Costs Net of VAT: Approx 115K (Allowing for 13.5% VAT. Some will be 21% whivh would reduce your net cost more)
Total Cost Net of VAT: 185000
Selling Price Net of 13.5%: Approx 242K
Net Profit before Tax: 57K
Corporate Tax at 12.5% (assuming you are setting up a company): Approx 7K
Net Profit after Tax is 50K

Obviously, there will be other costs involved if you want to take money out ie pay yourself a salary. But if you were to do two houses, you could have a 50K salary and 50k profit, based on these very, very basic figures. There will be things such as insurance, machinery, tools, but as your business would grow, the cost of these per house would reduce.

kluivert

Carb dont forget the two - thirds vat rule on the sale of the house.

Although this may not seem an issue you do have to inidicate reasons for selling the house at 13.5%.

Carb

kluivert wrote:

Carb dont forget the two - thirds vat rule on the sale of the house.

Although this may not seem an issue you do have to inidicate reasons for selling the house at 13.5%.

"17.4 The rate of VAT applying to services, including building services, depends on the “two-thirds" rule. This provides that a transaction is liable to VAT as a sale of goods at the appropriate rate and not as a service, if the value of the goods used in providing the service, that is their cost excluding VAT to the service contractor, exceeds two-thirds of the total VAT exclusive charge to the customer.

The “two-thirds" rule does not usually affect building services in which the labour element is substantial. It would be likely to come into operation in the case of a service consisting of the supply and installation of, say, a transformer or a strong room. The possibility of its application should never be overlooked and contractors should consult the local inspector of taxes if there is any doubt about the correct liability to tax. Sub-contractors, in particular, may find that the 21% rate may apply to their portion of a main contract even though the main contract may itself be liable at the 13.5% rate."

That came off the revenue website. The practice where I worked had several construction clients and I never seen an invoice been sent out with 21% vat.
Land and labour will make up a huge part of the costs anyway, plus most of the big materials such as blocks/concrete are all 13.5%.

In summary, there is no way that materials would make up two thirds of the cost of the house, especially in our labour market. If anything labour would make up two thirds.

daveg

theaviator wrote:

I am looking into starting a new business building & selling houses. The accountant I went to scared me off a bit though when she mentioned the profit after VAT.

Can I give you an example:

Site Cost: 70K
Cost of construciton: 130K (incl VAT)
Sell for 275K (incl VAT)
Accountant says that I will only come out with 20K profit after VAT/TAX etc. She says that I will not be able to get at the profit either as it is in the company. Is this the case as I am totally disillusioned.

Cheers !

Do you mind me asking where abouts in the country your thinking of starting your business?

theaviator

around the midlands area.

theaviator

Thanks a million Carb & Kluivert.
One more question...to a simple person like me, If I were to draw a salary of 50K, would I not have to pay tax @ circa 47%. Am I not taxing myself twice (12.5 copporate & 42%+prsi etc). How does this word??

Again, thanks a lot.

kluivert

The wage would be charged to the accounts as an expense, therefore reducing your profits and therefore reducing your corporate tax bill as well.

The money you draw as a wage will be taxed as you said at 47% (42% paye, 5% prsi).

However there are other tax efficient ways to withdraw cash from a company, again Mr A I would have to check my notes about that as its an area i havent looked at in awhile now.

Carb - would paying CGT @ 20% not be a better option. Build and Sell and declare gain on sale to be taxed at 20% instead if this is just a once off. Just an idea!

Is this a once off or are you going into property development.

Carb

kluivert wrote:

The wage would be charged to the accounts as an expense, therefore reducing your profits and therefore reducing your corporate tax bill as well.

The money you draw as a wage will be taxed as you said at 47% (42% paye, 5% prsi).

However there are other tax efficient ways to withdraw cash from a company, again Mr A I would have to check my notes about that as its an area i havent looked at in awhile now.

Carb - would paying CGT @ 20% not be a better option. Build and Sell and declare gain on sale to be taxed at 20% instead if this is just a once off. Just an idea!

Is this a once off or are you going into property development.

On taking your wages out, remember that up to 30K approx will only be at 20%, and you also get to choose your benefits ie VHI, pension etc. Paying into a pension fund is actually a very tax efficient way of getting money out of a company. There are other ways also, if you're married and your wife isn't working, you could make her a director and pay her a wage to avail of the full standard rate tax band. That's only some suggestions without knowing your personal circumstances.

Kluivert - On the CGT issue, if it was me, I'd do the first house without setting up a company, sell it and declare it as a capital gain and use the tax saving to help get the business up and running. After that, I'd think it quite difficult to argue that you weren't trading.

theaviator - Don't go rushing into setting up a ltd company either. There are numerous benefits to been incorporated but most of these are based on the company making money. In your example, if you only built one house per year and took everything out as wages, there is no benefit for the cost of incorporation. If you intend doing ten houses per year, well thats a different story.

theaviator

very good advice from both of you. well done.

kluivert

theaviator wrote:

very good advice from both of you. well done.

Sorry am looking at this as a once off project. Not as a trade.

theavaitor - any chance you could clarify if this is a once off or you wish to set up trade.

Carb

theaviator wrote:

I am looking into starting a new business building & selling houses.

I'd say a trade

kluivert

Carb wrote:

I'd say a trade

RTFQ! to me

theaviator

Trade alright.

kluivert

I would have to go with the suggestions outlined by Carb.

Good Luck with it.