Important Update regarding HoCo Capital Expenditure
During last year’s audit, MacKenzie Kerr noted that HoCo’s expenditure included the cost of new pumps that they considered was a capital item. They insisted that this could not be left as an expense but had to be removed and recorded as a fixed asset. However as HoCo acts only as an agent for the Titleholders it could not hold the asset itself and similarly the Titleholders do not have an independent legal existence that that could hold assets without creating further tax complications.
As a result they have to be recorded either in the books of the Foundation, as the largest titleholder, or of another division of NFD. The former is not cost effective as the VAT cannot be reclaimed and the capital allowances cannot be offset against corporation tax. The better option would appear to be for it to be done through NFD.
NFD would pay for the assets, record them in the Central division, reclaim the VAT, and claim capital allowances against Corporation Tax. The depreciation would be charged to the Central p&l account.
This arrangement would reduce the expenditure charged to HoCo and perhaps create a surplus in its accounts. NFD would recover costs by charges to HoCo using an internal “balancing charge” that effectively enables Hoco to treat capital costs as if they were ordinary maintenance costs. A charge for financing costs could also be considered.
In the long term there may be no overall saving. Any recovery by NFD from THA would result in a higher corporation tax charge which would cancel the original claim from capital allowances. The increased transfers from Ekopia and the FF final contribution to cover this could offset the earlier saving – but would spread it over a longer period.
Example enclosed: Hoco purchases a pump for £10,000, Capital allowances are claimed back over 5 years. Realistically there are likely to be capital purchases in a majority of years and the calculations will therefore become more complex. NFD will provide an “open books” arrangement to the TAG group so that this can be overseen.