UK Income or gain?

[neilsolaris]

Hi,

Two of my colleagues (both professional musicians) have been advised by their respective accountants that their musical instruments (violin and cello in this instance) should be recorded as income, not as a gain. Their instruments were used for business purposes, and neither operates an instrument buying and selling business.

Is anyone able to explain to me why it should be treated this way please? Any links please? I've looked high and low, and can't find any info that explains this. I don't understand why it isn't classed as a non wasting chattel and a gain on its disposal.

Many thanks for your help.

 

[Fidget]

Musical instruments in themselves aren't income. Any monies derived from using them, is income.

 

[neilsolaris]

Thanks, but does that address my question?

 

[neilsolaris]

I should have said, should the sale of their instruments be recorded as income or gain?

 

[nasir]

Hi, here's my humble input regarding the question posed above.

If at the time of purchase of such instruments the total expenses thereto have been deducted in respective tax returns for arriving at taxable income then at the time of sale of these instruments total proceeds would be treated as income too, for taxable income calculation.

Thanks & regards

 

[neilsolaris]

Thanks for your input, I appreciate it.

I know for a fact that the violinist didn't claim any capital allowances, but I'm not sure about the cellist. However, the accountant who gave the advice to the cellist didn't ask whether capital allowances had been claimed on the cello previously.

In any case, and this is where my knowledge is lacking a bit, I thought that as long as you make a profit on disposal, then there is no interaction between capital allowances and capital gains. In other words, you pay capital gains tax if applicable, and you also subtract the net proceeds from the main capital allowance pool (to the extent that capital allowances were previously claimed), and if the pool becomes negative, you have a balancing charge, liable to income tax.

I'm open to any other advice to put me right! Thanks again.

 

[Fidget]

By the sounds of it, it is income that will be taxed under CGT rules rather than income that will be taxed under income tax rules.

 

[neilsolaris]

Thanks Fidget. So to put it another way, you are saying this should be treated as capital gains tax, not income tax? If I've got you wrong would you mind clarifying please?

When I was studying ACCA, the online lecturer was careful not to refer to capital gains as income, so as not to confuse matters. It's been a while now, and I've forgotten much of the theory.

 

[Fidget]

Yes, that's what I'm saying, although you ought to get the clarification of that from the musicians and/or their accountants, but that's what it sounds like to me.

All money coming in to you is income. It's just categorised differently for tax purposes dependent on the source of it.

 

[neilsolaris]

Ok, so assuming I understand you correctly, you're in agreement with me, but not with the two accountants. I couldn't ask the accountant regarding the cello, even though I was in the meeting as well, because it wasn't my place to, and it would sound like I was challenging him! Regarding the violinist, I didn't want to question her too much about her accountant's advice, because again, it could come across as a criticism. I just can't help feeling there's an area of accountancy I'm missing, as two separate accountants gave the same advice recently.

By the way, the relevance of the categorization of the "income" (I call it gain, not income) of the cellist is the availability of the cellist's capital gains nil rate band. Therefore, it's important that it's correctly categorized.

 

[Fidget]

I'm sure if you'd asked the question, the accountants would've been happy to clarify for you without them feeling that you were challenging/criticising them.

But, thus far, I'm in agreement with the accountants. There's two types of income: Earned and Unearned. Earned is always subject to income tax, unearned may be subject to income tax, CGT or inheritence tax dependent on the source of it. So, a one-off sale of something for more than you paid for it would likely be subject to CGT rules, but the net proceeds of the sale is still a form of income. It is just taxed differently.

What we don't know (because you don't know) is what tax rules the accountants think should be applied. It's really difficult to give anything other than thoughts/opinions without knowing the full story.

 

[neilsolaris]

Are you using American accounting rules? Maybe it's the same anyway in this instance, I don't know.

That's just it. If he sells one of his cellos it'll be a one off sale. Whenever I sell an asset, used in business or not, its subject to cgt, not income tax. If I were to make repeated sales of similar items then the items I'm selling would be classed as inventory, and subject to income tax.

I will ask the accountant to clarify when I next meet him. He had no more knowledge of the cellos than I did, so I suspect he's simply wrong. There was no fuller story to this. I'll try to find out though.

 

[Fidget]

If they're resident in the UK for tax purposes, then it's UK tax rules rather than any accounting standards that matter. But there is definitely more to this than meets the eye. You've said that neither is involved in the selling of musical instruments, but then you've just said that if the cellist sells *one* of his cellos... so what's the story? Selling a single thing that you own is likely to be subject to CGT. Having more than one of whatever it is and selling is more likely to be classed as trading.

But yes, ask their accountants to clarify - they're the ones in pole position to answer since they'll have the whole story.

 

[neilsolaris]

I thought that maybe you were quoting American rules that didn't apply!

The accountant in question was for the company, not for his individual status as sole trader (to which he owns the cellos). I know more about his personal situation than his company accountant does. I believe he owns just two cellos, which he uses both for his business as a professional cellist. It's just he might need to sell one of them, that's all. So, according to my understanding, it'll be subject to cgt, which will use up his nil rate band for the year. I don't know when I'll get a chance to speak to his company accountant. In any case, it doesn't seem clear cut like his company accountant made it seem.