Court case update – mortgage interest relief

A group of landlords have lost their High Court attempt to force a judicial review of legislation to reduce tax relief on buy-to-let interest payments starting in April 2017. The groups hearing took place yesterday at the royal court of justice, London.

The group named the new measure on restricting mortgage interest relief the “tenant tax” and claim that tenants will see rent increases as a result.

The group argued that as the legislation applies to individuals and not corporate landlords, it is unlawful as it could result in a grant of state aid to corporate landlords.

This loss signals the end of the legal route but the group intend to continue their campaign to put pressure on MPs to amend tax policy.

Quarterly reporting update – Consultation released by HMRC

Last week HMRC released consultation documents which had more detail on the move to quarterly reporting. We have highlighted some of the main areas of consideration from the consultation. The consultation discusses sole traders and partnerships and how the move to quarterly reporting will affect them.

Who will have to report quarterly and what will be reported to HMRC?

  • Exemptions from quarterly reporting for unincorporated businesses with annual turnover below £10,000. We believe this will be total annual turnover, not turnover per business.
  • Four submissions will be made annually to HMRC for those who need to report quarterly. The fourth submission each year will include any necessary adjustments to figures such as capital expenditure/capital allowances and is described as an “end of year activity” submission in the consultation. The three submissions prior to the end of year activity submission will include sales / expense invoices and bank receipts and payments.
  • Those who genuinely cannot use digital tools will not be forced to do so under Making Tax Digital and will be exempted from the new obligations. HMRC are considering who will be exempted and will release more detail.
  • A consideration to defer the introduction of these new obligations by one year (from 2018 to 2019) for a limited group of businesses and landlords with annual turnover above £10,000 but below a defined upper income threshold. The upper income threshold is to be decided upon.

Changes in late filling penalties and tax payment due dates;

  • Late penalties will change and a new regime will be introduced. The consultation proposes a graduated model with each non-deliberate failure to submit information on time attracting penalty points. Only once the points reach a set level would a penalty be charged. A stronger sanction is outlined for those who are deliberately non-compliant.
  • Voluntary payments are discussed in the consultation and how HMRC will allocate payments. Quarterly reporting can be used to estimate the tax due for the quarter to pay the tax to HMRC. Seasonal fluctuations with businesses and other adjustments such as stock levels, work in progress, capital expenditure, bad debts and other yearly adjustments will not be included in every quarterly report, they will be included once a year in the end of year activity submissions.

 

 Software options;

  • HMRC will not be providing free software for businesses to use to report quarterly.
  • Some software providers will provide free software for very simple submissions but most businesses will have to pick software to use so that they can report quarterly to HMRC.

We have been working with Quickbooks to provide a cost effective solution to clients to enable them to report quarterly to HMRC. Please get in touch if you want to find out more about the Quickbooks online packages.

Property expenses changes in 16/17 tax year

Changes to the way in which landlords deduct costs for replacing furniture and fittings in rented properties from 6 April 16:

 

Who is likely to be affected

Companies, individuals and others, such as trusts or collective investment schemes that let residential properties.

General description of the measure

The Wear and Tear Allowance for fully furnished properties will be replaced with a relief that enables all landlords of residential dwelling houses to deduct the costs they actually incur on replacing furnishings, appliances and kitchenware in the property.

The relief given will be for the cost of a like-for-like, or nearest modern equivalent, replacement asset, plus any costs incurred in disposing of, or less any proceeds received for, the asset being replaced.

Detailed proposal

Operative date

The measure will have effect for expenditure incurred on or after 1 April 2016 for corporation tax payers and 6 April 2016 for Income Tax payers.

Current law

Current law providing for the Wear and Tear allowance is contained in sections 308A, 308B and 308C of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) for Income Tax and at sections 248A, 248B and 248C of the Corporation Tax Act 2009 (CTA 2009 for Corporation Tax).

Proposed revisions

Legislation will be introduced in Finance Bill 2016 to repeal the Wear and Tear Allowance provisions and make new provision for a deduction for the replacement of furnishings.

The deduction will be available in calculating the profits of a property business which includes a dwelling-house. The deduction is available for capital expenditure on furniture, furnishings, appliances (including white goods) and kitchenware, where the expenditure is on a replacement item provided for use in the dwelling.

The amount of the deduction is:

  • the cost of the new replacement item, limited to the cost of an equivalent item if it represents an improvement on the old item (beyond the reasonable modern equivalent) plus
  • the incidental costs of disposing of the old item or acquiring the replacement less
  • any amounts received on disposal of the old item

This deduction will not be available for furnished holiday lettings because capital allowances will continue to be available for them.

 

Considerations – previously payments towards white goods, such as fridges and freezers for rented properties did not gain any tax relief; the only allowance available was the wear and tear allowance. We believe this is a good change, as it encourages landlords to replace items in rented properties and also gives the fair amount of tax relief for this expenditure.

One area of caution is that the new relief from 6 April 16 is available on replacement of items, not on new items purchased.

 

Please feel free to ask us any questions you have about the changes.

 

HMRC extend data gathering powers

HMRC have focused on extending their data collecting powers to keep up with changing technology and payment methods.

Legislation gives HMRC the power to collect a wide range data about taxpayers financial affairs. Since 2014 HMRC has been able to collect data on credit and debit card transactions to help them identify traders who are not registered for VAT and should be, or traders who are not declaring income on their tax returns. HMRC also have powers to issue separate information notices to individuals and third parties who hold data on tax payers.

 

HMRC are now seeking to extend their bulk data collection powers to cover new payment methods and will also collect data from

  • Electronic payment providers and
  • Business intermediaries who facilitate transactions, usually online.

Data which HMRC can require includes the account holder’s

  • Name
  • Address
  • Telephone number
  • Email address
  • Website address
  • National Insurance number
  • VAT number
  • Unique Tax Reference (UTR)
  • Other identifying information
  • Bank account details
  • Status as individual, partnership or limited company