Making Tax Digital ITSA Postponed !

Businesses will have an extra year to prepare for the digitalisation of Income Tax, HM Revenue and Customs (HMRC) has announced today.

Recognising the challenges faced by many UK businesses and their representatives as the country emerges from the pandemic, and having listened to stakeholder feedback, the government will introduce Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) a year later than planned, in the tax year beginning in April 2024.

Businesses get more time to prepare for digital tax changes – GOV.UK (www.gov.uk)

MTD for Income Tax will now be mandated for businesses and landlords with a business income over £10,000 per annum in the tax year beginning in April 2024.

General partnerships will not be required to join MTD for ITSA until the tax year beginning in April 2025, while the date other types of partnerships will be required to join will be confirmed in the future.

steve@bicknells.net

Are HMO’s within the scope of ATED?

ATED is an annual tax payable mainly by companies that own UK residential property valued at more than £500,000.

You’ll need to complete an ATED return if your property:

  • is a dwelling
  • is in the UK
  • was valued at more than:
    • £2 million (for returns from 2013 to 2014 onwards)
    • £1 million (for returns from 2015 to 2016 onwards)
    • £500,000 (for returns from 2016 to 2017 onwards)
  • is owned completely or partly by a:
    • company
    • partnership where any of the partners is a company
    • ­collective investment scheme – for example a unit trust or an open ended investment vehicle

Returns must be submitted on or after 1 April in any chargeable period.

Some properties are not classed as dwellings. These include:

  • hotels
  • guest houses
  • boarding school accommodation
  • hospitals
  • student halls of residence
  • military accommodation
  • care homes
  • prisons

It is possible that dwellings contained within the same building can be treated as a single dwelling, and the aggregate value applied.  The details can be found in Section 117 FA 2013.

However, for a standard HMO property, where each of the dwellings is separately accessible, and none can be accessed privately via any of the other dwellings in the property, then none of the property values may need to be aggregated for the £500k threshold.

steve@bicknells.net

HMO’s denied Capital Allowances

HMRC have recently confirmed their view that common areas in Houses of Multiple Occupation (HMO) are parts of a “dwelling house” and ineligible for capital allowance claims.

Claims relating to Houses in Multiple Occupancy:

We are aware that some taxpayers have submitted claims for plant and machinery allowances in respect of shared parts of houses in multiple occupation (such as hallways, stairs, landings, attics and basements within the houses). They contend that these shared areas are not part of the dwelling-house and that allowances are therefore available. We disagree with this position. If you come across such a claim, please notify the Capital Allowances single point of contact for your area.

CA11520 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

The capital allowance legislation specifically denies tax relief for plant and machinery installed in a dwelling house. However, plant and machinery installed in the common areas such as hallways, stairs and lift shafts, in blocks of flats would qualify as the flats themselves are the dwellings, not the building as a whole.

Expenditure incurred on the provision of plant or machinery ‘for use in’ a dwelling-house is not qualifying expenditure for an ordinary property business, an overseas property business or the special leasing of plant or machinery.

CA23060 – Capital Allowances Manual – HMRC internal manual – GOV.UK (www.gov.uk)

This would seem inconsistent with the HMRC view on HMOs and there may be a test case on the interpretation, particularly as there is no definition of “dwelling house” in the tax legislation. There is also a lack of clarity concerning the status of University Halls of residence where there is often substantial expenditure on plant and machinery in common areas.

steve@bicknells.net

HMRC Post-transaction valuation checks (CG34) and why you need one

Post transactions checks are used in relation to capital gains, they can be used by individuals or companies.

Its a free service offered by HMRC.

HMRC state

If we agree your valuations we’ll not question your use of those valuations in your return, unless there are any important facts affecting the valuations that you’ve not told us about.

But HMRC say it could take at least 3 months to check the valuation.

You can only request a Post Transaction Valuation Check:

  • after disposals relevant to Capital Gains Tax
  • before the date you must file your Self Assessment tax return

Here is a link to the form

CG34 Post-transaction valuation checks for capital gains (publishing.service.gov.uk)

Why are they needed?

There are situation where transactions are not ‘arms length’ in other words they are between connected parties.

For example if you have a development company and sell property to related company.

You can use the CG34 for

  • Shares
  • Goodwill
  • Land
  • Other Assets

The CG34 is not mandatory, you don’t have to get a post valuation check, but if you do, you will gain protection against HMRC questioning your valuation (assuming they agree with you CG34 submission).

You will need to submit supporting documents for example a independent valuation report to justify the value.

For Land valuations you will also need

  • Copy leases
  • Tenancy Agreements
  • Plans of undeveloped land

Where do you send the form?

Taxpayers dealt with by HMRC’s High Net Worth Units, or Public Department 1 should send the completed CG34 to those offices.

Those dealt with by Specialist Trust Offices should send their forms to:

Specialist PT Trusts and Estates Trusts
SO842
Ferrers House
Castle Meadow
Nottingham
NG2 1BB

Other individuals, partnerships and personal representatives should send the completed form direct to:

PAYE and Self Assessment
HM Revenue and Customs
BX9 1AS

Companies should send to the office dealing with the company corporation tax affairs or if they do not have one, to:

Corporation Tax Services
HM Revenue and Customs
BX9 1AX

steve@bicknells.net

Car Business Mileage Rates have gone up – what are they now?

These changes only affect the fuel only rates, the business mileage rates are unchanged

Tax: rates per business mile

First 10,000 milesAbove 10,000 miles
Cars and vans45p (40p before 2011 to 2012)25p
Motorcycles24p24p
Bikes20p20p

Its the Approved Mileage Rates that keep changing

From 1 September 2021

You can use the previous rates for up to 1 month from the date the new rates apply.

Engine sizePetrol – rate per mileLPG – rate per mile
1400cc or less12 pence7 pence
1401cc to 2000cc14 pence8 pence
Over 2000cc20 pence12 pence
Engine sizeDiesel – rate per mile
1600cc or less10 pence
1601cc to 2000cc12 pence
Over 2000cc15 pence

From 1 June 2021 to 31 August 2021

Engine sizePetrol – rate per mileLPG – rate per mile
1400cc or less11 pence8 pence
1401cc to 2000cc13 pence9 pence
Over 2000cc19 pence14 pence
Engine sizeDiesel – rate per mile
1600cc or less9 pence
1601cc to 2000cc11 pence
Over 2000cc13 pence

1 March 2021 to 31 May 2021

Engine sizePetrol – rate per mileLPG – rate per mile
1400cc or less10 pence7 pence
1401cc to 2000cc12 pence8 pence
Over 2000cc18 pence12 pence
Engine sizeDiesel – rate per mile
1600cc or less9 pence
1601cc to 2000cc11 pence
Over 2000cc12 pence

1 December 2020 to 28 February 2021

Engine sizePetrol – rate per mileLPG – rate per mile
1400cc or less10 pence7 pence
1401cc to 2000cc11 pence8 pence
Over 2000cc17 pence12 pence
Engine sizeDiesel – rate per mile
1600cc or less8 pence
1601cc to 2000cc10 pence
Over 2000cc12 pence

For hybrid cars you must use the petrol or diesel rate which may differ significantly from the actual fuel costs. The advisory electricity rate for fully electric cars is 4 pence per mile.

Employees should carefully consider whether it is advantageous having private fuel provided for their company car.  Remember that the P11d benefit for having private fuel provided for a company car in 2021/22 is £24,600 multiplied by the CO2 emissions percentage for that vehicle.

For example, a director driving a Mercedes Benz E200 saloon company car (CO2 emissions 169g per km) would be assessed on 37% = £9,102 for 2020/21. If they are a higher rate taxpayer that would mean £3,641 tax. That is an awful lot of private fuel!

steve@bicknells.net

What counts as Labour under CIS (Construction Industry Scheme)?

Under the Construction Industry Scheme (CIS) if you use subcontractors who don’t have Gross Status the contractor has to make a deduction of 20% or 30% and pay it to HMRC.

In the CIS340 guidance, the deduction is applied as follows

There are 2 steps that contractors must follow.

Step 1: Work out the gross amount from which a deduction will be made by excluding VAT charged by the subcontractor if the subcontractor is registered for VAT, read the examples in CIS 340 Appendix D.

The contractor will need to keep a record of the gross payment amounts so that they can enter these on their monthly returns.

Step 2: Deduct from the gross payment the amount the subcontractor actually paid for the following items used in the construction operations, including VAT paid if the subcontractor is not registered for VAT:

  • materials
  • consumable stores
  • fuel (except fuel for travelling)
  • plant hire
  • the cost of manufacture or prefabrication of materials

The bit that is left after following the steps above is the Labour to which tax deduction of 20% or 30% is applied.

What is the Labour if the subcontractor has its own subcontractors?

The subcontractor needs to show the amount of labour inclusive of the subcontractors they have used!

They are charging the main contractor for all labour costs even if some of their subcontractors may be gross status.

steve@bicknells.net

What is Class 2 National Insurance and do Landlords need to pay it?

You make Class 2 National Insurance contributions if you’re self-employed to qualify for benefits like the State Pension.

Most people pay the contributions as part of their Self Assessment tax bill.

You pay Class 2 if your profits are £6,515 or more a year

ClassRate for tax year 2021 to 2022
Class 2£3.05 a week

So for the whole year that’s £158.60

Are you running a business?

You have to pay Class 2 National Insurance if your profits are £6,515 a year or more and what you do counts as running a business, for example if all the following apply:

  • being a landlord is your main job
  • you rent out more than one property
  • you’re buying new properties to rent out

If your profits are under £6,515, you can make voluntary Class 2 National Insurance payments, for example to make sure you get the full State Pension.

You do not pay National Insurance if you’re not running a business – even if you do work like arranging repairs, advertising for tenants and arranging tenancy agreements.

As soon as you reach state pension age, you stop paying Class 2 NIC if you carry on working. You only have to pay them on any earnings that were due to be paid to you before you reached state pension age.

In addition Companies who own properties don’t pay national insurance, national insurance is only paid by employees and the self employed.

Class 2 NI would also not apply if you use a letting agent to collect the rents – average fees would be 15%, even if it is a relative or your own company as then your role will only a passive investment role.

The key case on this topic is Rashid v Garcia (Status Inspector) (2002) Sp C 348

Decision released 11 December 2002.

National Insurance – Class 2 contributions – Self-employed earner – Landlord – Taxpayer had income from letting property – Claim for incapacity benefit – class 2 National Insurance contributions paid to qualify for benefit – Revenue took view that property rental activities did not entitle taxpayer to pay class 2 contributions as he was not carrying on business – Benefit refused – Whether taxpayer was self-employed earner carrying on business – Social Security Contributions and Benefits Act 1992, s. 2, 122.

The taxpayer had four properties income £10,942.

It was estimated that the taxpayer spent two to four hours per week on managing the properties and members of his family acting on his behalf spent 16 to 24 hours per week. The Special Commissioner considered this was insufficient activity to constitute a business so no Class 2 NI was due.

Back in 2015 HMRC did try to get Landlords to pay Class 2 as explained in our blog Should Landlords pay Class 2 NI? – Steve J Bicknell Tel 01202 025252

HMRC Examples NIM23800

Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.

Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.

Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.

Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.

steve@bicknells.net

New Multiple Penalties for MTD ITSA and VAT!

The new HMRC penalties cover late submission, late payment and interest harmonisation and unlike the old penalties you will now get points and penalties even if you owe no tax or are due a refund! there will be no soft landing period.

The new penalties take effect:

  • for VAT taxpayers for their first VAT return period starting on or after 1st April 2022
  • for ITSA (Income tax and self assessment) taxpayers within income over £10k subject to Making Tax Digital (MTD) for their first tax year or accounting period starting on or after 6th April 2023
  • for ITSA taxpayers with income below £10k starting 6th April 2024

In theory the penalties are fairer but they can work out more expensive than the current penalties.

The new system is based on points, each late return gets a penalty point which expire after 24 months.

The points only apply to VAT and ITSA (not to other taxes at the moment)

Once the penalty threshold is reached there is a fixed penalty of £200 for each missed return, there is an appeals process.

Submission FrequencyPenalty Theshold
Annual2 points
Quarterly 4 points
Monthly 5 points

Total points will only be reset to zero once when the following 2 conditions are met

  1. A period of compliance based on their submission frequency
  2. All submissions that were due within the preceding 24 months have been submitted
Submission FrequencyPeriod of Compliance
Annual24 months
Quarterly12 months
Monthly6 months

Late Payment Penalty

Late Payment could potentially mean you get two penalties depending on when you pay!

The first penalty will be levied 31 days after the payemnt due date and will be based on a set percentage of the balance outstanding.

The second penalty will be calculated on amounts outstanding from day 31 until the principle balance is paid in full or a payment plan agreed.

Time to Pay Payment plans suspend penalties.

HMRC will notify the penalties separately.

PenaltyDays after payment due datePenalty charge
First Penalty0 to 15No penalty payable
16 to 29Penalty calculated at 2% of what was outstanding at day 15
30Penalty calculated at 2% of what was outstanding at day 15

Plus 2% of what is still outstanding at day 30
Second PenaltyDay 31 plusPenalty calculated as a daily rate of 4% on APR for the duration of the outstanding balance

There will be a ‘period of familiarisation’ for the first year which is based on 30 days.

Interest Harmonisation

The VAT interest rules will change to be inline with ITSA

  • When an amount is not paid by the due date, late payment interest will be charged to the taxpayer from the date that the tax becomes overdue until the date payment is received
  • VAT Repayment Supplement will be replaced with Repayment Interest. Repayment Interest will be paid from the later of:
    • the due date of the return
    • the date the return is submitted

If HMRC owe you interest it will be paid at the Bank of England Base Rate -1% but if you owe HMRC interest its at the Bank of England base rate +2%.

Other things to note

  • The Gateway will tell you how many points you have
  • The Gateway will tell how penalties have been calculated
  • Agents will not be able to pay the penalties
  • When appealing you will need to say who was to blame for missing the deadline
  • When claiming the deadline was missed due to a health issue a declaration of honesty is required

steve@bicknells.net

Making Tax Digital Income Tax (MTD ITSA) registration starting soon!

MTD ITSA is at best going to be challenging for tax payers and accountants, but we love a challenge, don’t we?!

In the MTD ITSA there are

  • 900,000 Landlords
  • 2.5 Million Self Employed
  • 400,000 Partnerships

Over 130,000 probably need to change their year end and when MTD ITSA starts a single self assessment will be become 6 returns.

HMRC announced in August in there Agent Communications

Making Tax Digital for Income Tax Self Assessment (MTD ITSA) — Agents can sign-up customers in advance of April 2023

It has been confirmed that a bulk sign-up facility for MTD ITSA will not be possible due to several factors including each individual customer having different details to be input.

It is recognised that data will need to be input during the sign up process for each customer. It is accepted that this could be time consuming if all this had to be done at once, especially if it coincided with other peak demands such as the tax year end or VAT filing for example.

Following discussion with agents, HMRC is working to deploy a solution which will help flatten this workload. Agents will be able to sign up mandated MTD ITSA customers from 6 April 2022. This will not activate MTD obligations but will give agents the opportunity to spread the load of sign-up work across a 12-month period.

The back-end process is being worked on and further information will be issued. HMRC reaffirms, this will only come into effect from 6 April 2022 and that any sign-ups made before that date would be for the active pilot.

Agent Update: issue 87 – GOV.UK (www.gov.uk)

Since HMRC know all about tax payers (because they get annual Self Assessment Returns) and they know all about agents (because we have agent service accounts with HMRC that list our clients), why is it necessary to have a signing up process.

MTD ITSA is compulsory, so why aren’t the relevant tax payers automatically registered by HMRC?

Let’s hope HMRC can find a back-end process that will save us from manually enrolling millions of tax payers.

steve@bicknells.net

What is the Tax Treatment of Abortive Property Investment Costs?

Most investors, whether personal landlords or companies, will have suffered some abortive costs for deals that failed.

The nature of the costs will be capital for investors.

BIM35325 – Capital/revenue divide: general themes: abortive expenditure

Expenditure that would have been capital had it been successful does not change its character merely because in the event it is abortive. ECC Quarries Ltd v Watkis [1975] 51TC153 was concerned with costs incurred in an unsuccessful planning application.

If the application had succeeded the expenditure would have been capital. In the event the application failed; no asset was acquired or modified (and the company did not rid itself of any disadvantageous asset).

What this means is that property investors don’t get any tax relief for abortive fees.

This can be extremely bad news as the case of Hardy v Revenue & Customs [2015] UKFTT 250 (TC) a 10% deposit was paid and the outcome was that HMRC disallowed the claim for relief, the taxpayer appealed and the appeal was dismissed.

It seems unfair but the seller who receives the deposit treats it as a capital gain and pays tax on it.

If a property trader/developer had suffered the loss of the deposit and the costs was ‘wholly and exclusively’ for the purpose of the trade, the expenditure might be an allowable deduction from profits.

steve@bicknells.net