HMRC and the frustrating saga of MTD ITSA

On the 19th December 2022 HMRC changed their minds yet again!!

In a Gov.uk announcement they said..

Understanding that self-employed individuals and landlords are currently facing a challenging economic environment, and the transition to Making Tax Digital (MTD) for Income Tax Self Assessment (ITSA) represents a significant change to taxpayers and HMRC for how self-employment and property income is reported, the government is giving a longer period to prepare for MTD. The mandatory use of software is therefore being phased in from April 2026, rather than April 2024.

From April 2026, self-employed individuals and landlords with an income of more than £50,000 will be required to keep digital records and provide quarterly updates on their income and expenditure to HMRC through MTD-compatible software. Those with an income of between £30,000 and £50,000 will need to do this from April 2027. Most customers will be able to join voluntarily beforehand meaning they can eliminate common errors and save time managing their tax affairs.

The government has also announced a review into the needs of smaller businesses, and particularly those under the £30,000 income threshold. The review will consider how MTD for ITSA can be shaped to meet the needs of these smaller businesses and the best way for them to fulfil their Income Tax obligations. It will also inform the approach for any further roll out of MTD for ITSA after April 2027.

Mandation of MTD for ITSA will not be extended to general partnerships in 2025 as previously announced. The government remains committed to introducing MTD for ITSA to partnerships in line with its vision set out in the government’s tax administration strategy.

Government announces phased mandation of Making Tax Digital for ITSA – GOV.UK (www.gov.uk)

On the one hand I am sure many Landlords and the Self Employed will have celebrated this news, as in general, they aren’t ready and hate the idea of MTD.

On the other hand software providers and accountants who have spend considerable time and resources planning and getting ready will be disappointed, 2024 was going to be the year they had looked forward to when clients would be mandated to use software, no more January panics and bags of receipts.

What makes this particularly frustrating for everyone is that HMRC have moved the goals and timescale, this has happened at every stage of MTD. HMRC insist it will happen on the dates they set and then as the date gets closer they changes their mind!!

steve@bicknell.net

Residential Property Capital Gains Overpayment Madness

By now I am sure you are familiar with the rules

From 27 October 2021, you must report and pay within 60 days of completion of conveyance.

For example, if you complete the disposal on 1 November you must report and pay your Capital Gains Tax by 31 December.

If the completion date was between 6 April 2020 and 26 October 2021 you must report and pay within 30 days of completion of conveyance.

You may have to pay interest and a penalty if you do not report and pay on time.

Tell HMRC about Capital Gains Tax on UK property or land if you’re not a UK resident – GOV.UK (www.gov.uk)

You report the gains using this link Report and pay your Capital Gains Tax: If you have other capital gains to report – GOV.UK (www.gov.uk)

If you need a tax agent to help you you have to start the process get and X reference, give that to you tax agent/accountant, they then sent the client a link to become their agent.

You also have to report the information again on your self assessment return.

What happens if you over pay the CGT?

You would think that doing the self assessment would generate a refund, but thats not the case, very frustrating!

The only way to recover or offset the overpaid CGT is to follow a new workaround shared by HMRC at the end of June.

The workaround suggests either:

(a) amending the UK Property Return before submitting the self-assessment return for the year to recover the overpayment that way; or

(b) submitting the self-assessment return and then calling HMRC to ask for a manual transfer to be made of the payments showing on the property account against the self-assessment account so it can then be offset against the total self-assessment bill.

Offsetting overpaid CGT against income tax | ICAEW

CGT Overpayment – Refund request – Community Forum – GOV.UK (hmrc.gov.uk)

CG10450 – Overpayment relief – HMRC internal manual – GOV.UK (www.gov.uk)

steve@bicknells.net

Massive changes under discussion for the tax of Property Investors!!

woman in white shirt showing frustration

First we had the OTS Property Income Review dated 25th October 2022, since then the Policy Paper has been issued (1st November 2022) so it looks like we will see the adoption of at least some of the recommendations in Autumn Statement on 17th November 2022.

Key findings and priority recommendations

Furnished holiday lettings

  • Short-term rentals meeting the conditions fall into the furnished holiday lettings regime. This regime provides more favourable tax treatment than the main property income rules, with more tax relief for costs, including interest, and potentially a reduced Capital Gains Tax bill on disposal.
  • The OTS recommends that the government consider whether there is continuing benefit to the UK in having a separate tax regime for furnished holiday lettings.
  • If the furnished holiday lettings regime is abolished the OTS recommends that the government consider whether certain property letting activities subject to Income Tax should be treated as trading and whether it would be appropriate to introduce a statutory ‘brightline’ test to define when a property trading business is being carried on.
  • If the regime is retained, the introduction of a private use restriction may allow for relaxation of other requirements to enter the regime, making it simpler to understand and predict whether one is in scope.
  • Should the government conclude that the furnished holiday lettings regime be retained, the OTS recommends that the government then consider:
    • removing the current distortion of allowing the regime for properties in the European Economic Area, either by permitting worldwide properties to qualify, or by limiting the regime to UK properties
    • restricting the regime to properties used for commercial letting by removing the potential for personal occupation. This would permit a simpler approach to defining the regime

Repairs, replacements, and improvements

  • A long-standing area of complexity for taxation of property is whether costs are allowable straight away as repairs and replacements, or represent capital expenditure as improvements and should be disallowed for Income Tax.
  • The OTS recommends that HMRC should enhance the guidance in respect of the boundary between repairs and improvements to include clear examples of common situations, perhaps using flow-charts to lead towards case-by-case answers.
  • The OTS recommends that the government consider introducing a broader immediate Income Tax relief for all property costs – other than where work is part of the capital cost of the building, such as the initial fit-out of properties bought in a dilapidated state or structural work such as extensions to the property.

Jointly owned property

  • HMRC data indicates that almost half (1.5 million) of all taxpayers renting out property do so jointly, mainly with a spouse or civil partner, or with others.
  • Those not married nor in civil partnership will by default declare the split of income based on beneficial ownership, but can instead choose any other split they like without any form of election.
  • Conversely, spouses and civil partners, (providing they are living together) default to equal 50:50 shares for property other than furnished holiday lets, and respondents made very clear that the process to instead use a split based on beneficial ownership (using form 17) is complex and burdensome even for advisers, and taxpayers themselves are normally unaware of the need. This creates an unnecessary complexity and burden, and potentially accidental non-compliance.
  • The OTS recommends that the government should consider removing the anachronistic 50:50 rule for spouses and civil partners and aligning treatment to that of other joint owners and to the position for spouses under Capital Gains Tax and Inheritance Tax. To prevent abuse, the default beneficial ownership position should not be capable of being displaced.
  • The government may also wish to consider removing the ability for joint owners to decide on a split other than beneficial ownership.

Making Tax Digital for Income Tax

  • From April 2024, landlords in scope of Making Tax Digital (MTD) for Income Tax will need to keep digital records and file updates quarterly using compatible software. There was a very high level of concern common to all respondents about how the rules would apply to landlords.
  • The OTS recommends that HMRC should establish a system to deal with MTD for Income Tax for jointly owned properties, for example by making a jointly owned property the MTD filing entity.
  • Landlords may rely on multiple parties to provide information and potentially to support submitting reports.
  • HMRC needs to be able to authorise MTD for Income Tax filing agents alongside tax agents. This is needed because letting agents and bookkeepers will maintain digital records and may support quarterly submissions on behalf of some landlords. Specific professional standards and responsibilities will be needed for MTD for Income Tax filing agents.
  • The gross rental limit for being required to adopt MTD for Income Tax has been set at £10,000. The evidence suggests that a landlord with such low gross rentals will have a modest net profit, if any. The OTS acknowledges that, although there would be an Exchequer impact on raising the threshold, this could be outweighed by lower customer costs, higher levels of compliance and better taxpayer and agent engagement.
  • The OTS recommends that HMRC give consideration to increasing the minimum gross income threshold for MTD for Income Tax for landlords above £10,000, at least for the medium term.
  • As is clear from the points above there are unresolved complexities within MTD for Income Tax.
  • The OTS recommends that MTD for Income Tax should not apply to landlords until these major points have been dealt with by HMRC and by a range of software providers. Time will be needed to test new systems before adoption.

These changes are huge, if implemented there will be widespread confusion about how to report property income, this is already a complex area of tax, most of these changes will probably mean property owners end up paying more tax!

steve@bicknells.net

Sole Directors – time to change your model articles – Hashmi v Lorimer-Wing 2022

UK Companies are normally formed using model articles, they are contained in the Companies Act 2006 and replaced the previous Table A articles.

Model Articles were designed a ‘one size fits all’ solution and until now pretty much everyone including sole director companies have adopted them. The recent high court judgement has changed that!

In the model articles section 11(2) states

The quorum for directors’ meetings may be fixed from time to time by a decision of the directors, but it must never be less than two, and unless otherwise fixed it is two.

Model articles for private companies limited by shares – GOV.UK (www.gov.uk)

The case of Hashmi v Lorimer-Wing 2022 was the result of a dispute between directors, leaving the company with one director. The High Court Judge decided in the case that Model Articles are not suitable for single director companies.

What should sole director companies do now?

Appoint another Director

It sounds obvious but might not work for everyone, the company probably has a sole director for a good reason so appointing another director isn’t probably a good idea?

Change the Articles

Assuming you don’t appoint another director, then you have to do this. Following the High Court decision hundreds of thousands of companies will now be doing this. But it won’t fix decisions already taken by a sole director!

How do you deal with decisions already taken by a Sole Director?

You will need a written shareholders resolution to ratify decisions taken by you as a sole director.

You have 15 days from signing the resolution to file at companies house!

So don’t panic, if you have model articles and you are a sole director, a resolution and new articles will fix the situation.

steve@bicknells.net

Can you get the company to buy your solar panels?

aerial view of two houses with roof tiles

At the moment the UK like other countries is in the depth of an energy crisis, mainly caused by the price of gas and lack of gas supplies.

Energy prices are higher than they have ever been, even with potential government intervention the costs will still be high. On top of that we have climate change, if we are to avoid climate disasters, we need to use renewable energy, such as Solar.

There has never been a better time to make your home more energy efficient.

Solar Panels and Batteries could mean you could become close to self-sufficient for energy, harnessing sunlight in the daytime, storing it in batteries and using it at night.

What if your company purchased a solar system for your home as benefit in kind, what would the tax be?

VAT

From 1 April 2022 until 31 March 2027 a zero rate applies to the installation of certain specified energy-saving materials in, or in the curtilage, of residential accommodation in Great Britain 

Energy-saving materials and heating equipment (VAT Notice 708/6) – GOV.UK (www.gov.uk)

It makes no difference whether your company purchases the system or whether an individual purchases it.

Solar panels include all systems that are installed in, or on the site of, a building and that are:

  • solar collectors such as evacuated tube or flat plate systems, together with associated pipework and equipment, such as circulation systems, pump, storage cylinder, control panel and heat exchanger
  • photovoltaic (PV) panels with cabling, control panel and AC/DC inverter

Capital Allowances

Expenditure on solar panels is special rate expenditure on the basis they are integral features of buildings or structures.

Integral features expenditure can also qualify for AIA, they do not unfortunately qualify for the super deduction (must also be a company to qualify for the super deduction).

Click to access Super_deduction_factsheet.pdf

https://www.gov.uk/hmrc-internal-manuals/capital-allowances-manual/ca22335

To qualify for the allowance the conditions at S33A (1) and (2) etc must be met, please see the link below

EXPENDITURE ON INTEGRAL FEATURES (s. 33A) | Croner-i Tax and Accounting (croneri.co.uk)

Ownership of the property is not a requirement to qualify however the person that incurs the expenditure must own the P&M because of incurring it.

Benefit In Kind

As an employee, with the use of a company assets comes a chargeable BIK. The basic calculation is 20% of market value when first available less any unavailability and any contribution. 

Example – Solar Panel System Cost = £16,000 x 20% BIK = £3,200 BIK on which the tax is 20% = £640 per year or 40% = £1,280 per year in addition to the tax there is also Class 1A NI at 13.8% (£441.60), but the overall costs is still below the energy cap of £3,500 and even below the Governments suggested cap of £2,500.

In our particular case we have electric cars and work from home and use significantly more than the average levels.

The benefit in kind is reported in section L (assets placed at the disposal of the employee) of the P11D.

https://www.gov.uk/hmrc-internal-manuals/employment-income-manual/eim21873

steve@bicknells.net

When does the Corporate Bodies 15% SDLT Rate Apply?

modern building against sky

Most people aren’t aware of the 15% which can apply to corporate property purchases over £500k and expect to pay the rates below (these are the rates with the extra 3%)

Property or lease premium or transfer valueSDLT rate
Up to £125,0003%
The next £125,000 (the portion from £125,001 to £250,000)5%
The next £675,000 (the portion from £250,001 to £925,000)8%
The next £575,000 (the portion from £925,001 to £1.5 million)13%
The remaining amount (the portion above £1.5 million)15%

Stamp Duty Land Tax (SDLT) is charged at 15% on residential properties costing more than £500,000 bought by certain corporate bodies or ‘non-natural persons’. These include:

  • companies
  • partnerships including companies
  • collective investment schemes

These bodies may also need to pay Annual Tax on Enveloped Dwellings.

Relief from the 15% higher rate charge

The 15% rate does not apply to property bought by a company that is acting as a trustee of a settlement or bought by a company to be used for:

  • a property rental business
  • property developers and traders

FA03/S55/SCH4A: property rental businesses FA03/SCH4A/PARA5

Where the acquisition of a chargeable interest is exclusively for the purpose of exploitation as a source of rents or other receipts in the course of a qualifying property rental business, the 15% higher rate charge will not apply to the transaction. Instead, SDLT will be charged at the higher rates (the ones with the extra 3% in the table above) – see SDLTM09835 for more information on companies and the higher rates.

To qualify as a qualifying property rental business, the business must meet two conditions:-

  • it must be a property rental business as defined in Chapter 2 of Part 4, CTA 2009 (excluding the condition that the profits are chargeable to corporation tax – see PIM1020 onwards for more information), and
  • it must be carried on a commercial basis and with a view to a profit.

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09555

This relief may be withdrawn in certain circumstances:-

https://www.gov.uk/hmrc-internal-manuals/stamp-duty-land-tax-manual/sdltm09660

So thankfully most companies won’t have to pay 15% but this has been a source of confusion for some clients.

steve@bicknells.net

Don’t buy a holiday let in a company if you want stay in it!

interior of contemporary house on lake on cloudy day

Generally companies are great because corporation tax rates are lower than income tax rates, however, for Holiday Lets company ownership can be a problem if you have personal use for the following reasons (of course if you don’t want to stay there these don’t apply):

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 — find out the meaning of ‘dwelling’ in the next section
  • 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

Chargeable amounts for 1 April 2022 to 31 March 2023

Property valueAnnual charge
More than £500,000 up to £1 million£3,800
More than £1 million up to £2 million£7,700
More than £2 million up to £5 million£26,050
More than £5 million up to £10 million£60,900
More than £10 million up to £20 million£122,250
More than £20 million£244,750

Benefit in Kind

Here is an example from HMRC

A UK company purchases a flat in a French ski resort for £200,000. It is agreed that a market rental for the property would be £500 per week during the 6 month skiing season and £100 per week during the rest of the year. A husband and wife who are both directors of the company use the flat for holidays with their children for 3 weeks during the ski season and one week in the rest of the year. Their children are neither employees nor directors of the company. The employer advises that the sole reason the property was bought was as a holiday home for the husband and wife. It has only been used by them as a holiday home.

We would argue in this case that provided is equivalent to available for use. Assuming that the flat was habitable for the whole of the year we would seek a benefit under Part 3 Chapter 5 measured on availability for the whole of the year. The employer may argue that the husband and wife work full time and that this prevents them using the flat for more than the 4 weeks in the year of actual use and so they are effectively only provided with it for 4 weeks. We do not accept that argument.

If the cost of the accommodation exceeds £75,000, then the amount of the cash equivalent would be calculated in accordance with Section 106 ITEPA 2003 (see EIM11472). As the annual value is based on the open market rental, under ESC A91 the cash equivalent of the benefit is restricted to step 1 of Section 106. This would mean that the cash equivalent for the tax year would be £15,600 (£500 x 26 + £100 x 26). Under Section 108 that would be split between the husband and wife in whatever way was just and reasonable, presumably half each in this case (see EIM11472).

The amount of the benefit under section 106 is:

•Step 1 – the cash equivalent as if section 105 ITEPA 2003 applied (see EIM11431)

•Step 2 – ORI × (C – £75,000) (this amount is called the additional yearly rent), where:

•C is the cost of providing the living accommodation (see point three above) and

•ORI is the official rate of interest

•Step 3 – calculate the rent that would have been payable if the property had been let for the taxable period at that additional yearly rent (see EIM11428 for taxable period)

•Step 4 – add together the amounts calculated under step 1 and step 3. From this total subtract any excess rent paid by the employee. The answer is the amount of the benefit.

FLM Indicator have a calculator to work this out if you need it.

What would be the tax if its personally owned?

If the property is owned personally then a SA105 Box 10 Private Use Adjustment is made, this excludes a % of the property costs for the period of private use. If you only stay there for a short period its going to be a much lower cost.

steve@bicknells.net