BMG Weekly Tax Tips
1. Late filing appeals
The 2016/17 tax return season was plagued by issues with tax software, which prevented many tax returns from being filed online. The HMRC computer will issue a late filing penalty for a paper return received after 31 October unless there has been some manual intervention.
If you were forced to submit a paper tax return as the taxpayer’s circumstances lay within one of the online filing exceptions, but a penalty notice has been issued, submit an appeal against it without delay. You have a valid reasonable excuse for the “late” paper return because online filing was impossible for that taxpayer, so state that on the appeal form.
There can be technical grounds for challenging the penalty notice, for example, that it was not correctly authorised by an HMRC officer. This was the successful argument in Khan Properties Ltd, which was given some publicity in late January. However, that case concerned penalties for late corporation tax returns, which are issued under a different procedure to that used for SA penalties. So that argument is unlikely to work for SA penalties.
Another technical point, which tribunal judges are accepting in some cases, is that HMRC can’t show that the penalty notices were sent to the taxpayer. HMRC’s recording systems are so poor that this proof is often missing, see the case of Rafik Patel. Also in Rachid Halfaoui the judge said HMRC did not meet the burden of proof required to show the penalty notices were correctly issued.
It may be possible to argue that that tax return itself was not correctly issued as in the case of David Goldsmith. However, where the tax return was issued but the taxpayer didn’t receive it because they had moved house, the penalty is likely to stick. Taxpayers have an obligation to tell HMRC when they change address, or leave the country (see case of Amanda Headen).
This tax relief was introduced in 1992 to increase the availability of low cost accommodation for tenants, but the rental market has changed a lot since then. There is high awareness of rent-a-room relief, but also a lot of confusion about when it can apply.
Rent-a-room relief covers rent of up to £7500 per year from letting furnished residential accommodation in the taxpayer’s own home. The taxpayer must live in the same property. However,
the relief can apply to rent received when letting the whole house for short periods, while the taxpayer is temporarily away on holiday, as long as the taxpayer has not made another home elsewhere.
The relief can’t apply to income from holiday lets where the owner does not occupy part of the same property. Similarly, it can’t apply to income from a buy-to-let which is not simultaneously occupied by the landlord.
The taxpayer does not have to notify HMRC that they are claiming the relief, if the gross rent does not exceed £7500. If the gross rents exceed that figure the taxpayer must choose to be assessed either on the excess gross rents above the relief (method B), or on the actual profits from the letting (method A).
Many people let rooms in their own home by the night through sites such as AirBnB.com. This income is covered by the rent-a-room scheme, even if it amounts to a bed and breakfast business (see Helpsheet HS223), as long as the landlord lives in the same property.
However, letting of rooms by the night doesn’t meet the aim of increasing low cost housing, and the Government is considering changing the rules for rent-a-room relief to exclude very short term lets. It has issued a call for evidence to collect views on how the rent-a-room scheme is currently used. Do encourage your clients to respond if they use rent-a-room to cover their B&B earnings.
3. Contractor loan schemes
In our newsletter on 14 September 2017, we told you about HMRC’s complaint to the Advertising Standards Authority (ASA) about a tax avoidance scheme, which used disguised remuneration trusts to make loans to the business owners. That complaint was upheld.
HMRC has complained again about another tax avoidance scheme concerning contractors’ loans, and the ASA has also upheld that complaint.
It seems incredible that such schemes are still being advertised, and that the only way to get that advertising removed is for HMRC to complain to the ASA. However, it is comforting that the ASA ruling will apply to all advertising of similar schemes, and not just to the promoter named in the complaint.
If your client used a contractor loan scheme in the past, they need to pay the tax avoided before the contractors’ loan charge comes into effect from 5 April 2019 (see newsletter 31 March 2016 and Spotlight 32). If the loan scheme involved a company located in the Isle of Man, the Channel Islands, or in another offshore financial centre, the requirement to correct (RTC) will apply.
We explained in our newsletter on 8 February 2018 how penalties of 200% of the tax due will be imposed under RTC, if the taxpayer does not make a disclosure of tax related to offshore interests before 30 September 2018. HMRC have produced a useful short summary of the requirement to correct rules, which is suitable for sending to clients.