Property not let at commercial rates

There are special rules that apply when a property is let at less than a commercial rate or is not let on commercial terms. These rules also apply if a property is occupied rent free or at less than a commercial rate, for example, a property is occupied by a family member at a reduced or nil rent.

In these circumstances, HMRC can take the view that unless the landlord charges a full market rent for a property and imposes normal market lease conditions, it is unlikely that the expenses of the property are incurred ‘wholly and exclusively’ for business purposes.  Problems may also arise when considering the deduction of expenses during periods when the property is lived in by ‘house sitters’ who do not make any payment whilst staying at the property.

HMRC generally accepts that if a property is let at below the market rate (as opposed to providing it rent-free), the landlord can deduct the expenses of that property up to the rent they receive from letting the property. This means that the affected property produces neither a profit nor a loss. Any excess expenses cannot be carried forward to be used in a later year.

If the landlord is actively seeking a tenant and a relative house sits while it is empty, relief will not be restricted as long as the property remains genuinely available for letting. Relief for capital expenditure on uncommercial lettings may also be restricted.

Implementation of the loan charge

HMRC has published further guidance on the implementation of the loan charge and has made clear there will be no special settlement terms.

This follows an independent review earlier this year into whether the loan charge was an appropriate way of dealing with loans schemes (also known as disguised remuneration tax avoidance schemes) that have been used by some employers and individuals in order to try and avoid paying Income Tax and National Insurance Contributions (NICs).

The government agreed a series of changes to the loan charge following the review. The amendments went before Parliament in July 2020 and became law following Royal Assent. One of the main changes following the review was confirmation that the loan charge would not apply to users of disguised remuneration avoidance schemes between 6 April 1999 and 5 April 2016 who settled the tax due with HMRC on or after 16 March 2016 and before 11 March 2020.

Most people who have used disguised remuneration schemes will fall into one of 5 main groups, depending on their circumstances.

This will determine what they need to do next, although taxpayers with more complex affairs may fall into several different categories. These groups are:

  1. Taxpayers who have settled with HMRC and are not due a refund
  2. Taxpayers still settling with HMRC
  3. Taxpayers who have not settled and will pay the loan charge
  4. Taxpayers who have settled and are due a refund or waiver following the independent review
  5. Taxpayers who no longer have to pay some, or all, of the loan charge but have not settled all of their use of DR schemes

Taxpayers that have outstanding disguised remuneration loans that are subject to the loan charge need to file their 2018-19 Self Assessment tax return by 30 September 2020, including a report of any loan balances subject to the loan charge, and put in place any arrangements they need to pay the charge due on that date. Taxpayers can now elect to spread the loan balance over 3 tax years.

New measures to tackle promotion of tax avoidance

HMRC has published a series of a consultations together with details of proposed legislative changes to existing anti-avoidance regimes to strengthen HMRC’s ability to further clamp down on the market for tax avoidance.

The proposals include:

  • ensuring HMRC can effectively issue stop notices to promoters, under the Promoters of Tax Avoidance Scheme (POTAS) rules, to make it harder to promote schemes that do not work
  • preventing promoters from abusing corporate entity structures to avoid their obligations under the POTAS rules
  • ensuring HMRC can obtain information about the enabling of abusive schemes (for the purposes of the Enablers Penalty Regime) as soon as they are identified and ensuring enabler penalties are felt without delay when a scheme has been defeated at tribunal
  • ensuring that HMRC can act quickly and decisively where promoters fail to provide information on their avoidance schemes under the Disclosure of Tax Avoidance Schemes (DOTAS).
  • making further technical amendments to the POTAS regime so that it continues to operate effectively and to ensure that the General Anti Abuse Rule (GAAR) can be used to counteract partnerships as intended.

The consultation is open for comment until 15 September 2020. The new measures are expected to be included in the Finance Bill 2020-21.

HMRC to gain new civil information powers

A new measure that will provide HMRC with additional civil information powers is expected to take effect when the Finance Bill 2020-21 receives Royal Assent. The new measure known as a Financial Institution Notice (FIN) will be used to require financial institutions to provide information to HMRC, when requested, about a specific taxpayer and without the need for approval from the independent tribunal that considers tax matters.

Currently it takes HMRC on average 12 months to respond to requests for third party financial information from other tax authorities when an information notice is needed, whereas the target under international standards is six months. The introduction of the new FIN will remove the current requirement for HMRC to obtain approval from the tax tribunal before obtaining information from financial institutions and therefore bring the UK into line with international standards on tax transparency and on the quality and speed of exchange of tax information.

The FIN will be balanced by a number of taxpayer safeguards, including:

  • the information sought will have to be reasonably required for the purpose of checking a known taxpayer’s tax position. For international requests, the information in the FIN will need to be relevant to the administration or collection of tax and the jurisdiction requesting the information would need to have exhausted all reasonable domestic ways to get the information;
  • documents subject to legal professional privilege cannot be requested;
  • HMRC will be required to tell the taxpayer why the information is needed, unless a tax tribunal rules this condition should not apply;
  • an authorised officer of HMRC (someone with the relevant experience and training) will need to approve the decision to issue a FIN;
  • if a Financial Institution does not comply with a FIN, and as a result HMRC charges penalties, the Financial Institution will be able to appeal against the penalties

In addition, HMRC is required to report to Parliament annually on the use of the FIN.

Making Tax Digital next steps

HM Treasury has confirmed the extension of Making Tax Digital (MTD) to cover businesses with a turnover below the VAT threshold and for certain individuals who file Income Tax Self-Assessment tax returns. This announcement provides much-needed clarity of the way forward for this scheme.

MTD started in April 2019 (for VAT purposes only) when businesses with a turnover above the VAT threshold of £85,000 became mandated to keep their records digitally and provide their VAT return information to HMRC using MTD compatible software. Since the launch more than 1.4 million businesses have joined the programme.

The first part of the further roll-out of MTD will start April 2022, when MTD will be extended to all VAT registered businesses with turnover below the VAT threshold of £85,000. This will be followed one year later (April 2023) when MTD will be extended to taxpayers who file Income Tax Self-Assessment tax returns for business or property income over £10,000 annually.

HMRC has said that the long lead-in time will allow businesses, landlords and agents time to plan. It also gives software providers enough notice to bring a range of new products to market, including free software for businesses with the simplest tax affairs.

Financial secretary to the Treasury Jesse Norman said:

'We are setting out our next steps on Making Tax Digital today, as we bring the UK’s tax system into the 21st century. Making Tax Digital will make it easier for businesses to keep on top of their tax affairs. But it also has huge potential to improve the productivity of our economy, and its resilience in times of crisis.'

The government has also confirmed that it remains committed to extending MTD to other taxes. The government will also consult later this year on the detail of extending MTD to incorporated businesses with Corporate Tax obligations.

Lifetime ISA rules changed

The Lifetime ISA allows those aged between 18 and 40 to save for a new home or for their retirement. Under the scheme, the government provides a 25% bonus on yearly savings of up to £4,000 and once you start saving before you are 40, you can continue using the scheme until you turn 50. The money held in a Lifetime ISA can be used to purchase a first home worth up to £450,000 anywhere in the UK or withdrawn tax-free after your 60th birthday.

The money invested in a Lifetime ISA can be used for other purposes but is usually subject to a withdrawal charge. Under a temporary rule change, people whose income has been affected by Coronavirus and who want to access their Lifetime ISA funds early will no longer face this withdrawal charge. The only other exception is if a saver is terminally ill and given less than 12 months to live.

The Treasury will legislate for a temporary reduction in the Lifetime ISA withdrawal charge to 20% for the current tax year, from 6 March 2020 until 5 April 2021. This means you will only have to pay back any government bonus you have received but will not pay the additional withdrawal charge of 5%. This means that if you put £1,000 into the scheme and had £1,250 after the bonus then if you withdraw this amount you will lose the bonus but will receive your full £1,000 back.

The rule change will be backdated to 6th March, so anyone who has withdrawn their money early since that date and paid a 25% charge will have the difference refunded.

Gift Aid for cancelled charity events

HMRC has published new guidance on the scheme for charities that have had events cancelled due to coronavirus.

The Gift Aid scheme allows charities or Community Amateur Sports Clubs (CASC) to take a taxpayer’s donation and, provided all the qualifying conditions are met, to reclaim the basic rate tax. This allows for an extra 25p of tax relief on every pound donated to charity.

HMRC will accept that where a person due a refund decides to donate this to the charity, the charity can still claim gift aid subject to the following:

  • the individual does not receive a benefit as a result of their donation, agrees that the cost of their ticket becomes a donation and completes a Gift Aid declaration.
  • the charity must also keep an audit trail, including a copy of the agreement from an individual agreeing to the donation of the cost of the ticket.

The charity no longer has to physically refund the ticket price for the individual to re-donate. If a charity event has been postponed and not cancelled, any tickets for that event are not eligible for the temporary changes.

Tax-Free Childcare scheme

The Tax-Free Childcare Scheme (TFCS) is open to all eligible families with children under 12. It was announced as part of the Budget measures that a service improvement will be made to ensure the TFCS is compatible with school payment agents. This will allow parents of up to 500,000 school-aged children across the UK to access the TFCS and use it towards the cost of their wraparound childcare (such as breakfast and after-school clubs).

The TFCS helps support working families with their childcare costs. The scheme provides for a government top-up on parental contributions. For every 80p in the £1 contributed by parents an additional 20p or 20% will be funded by the government up to a maximum total of £10,000 per child per year. This will give parents an annual savings of up to £2,000 per child (and up to £4,000 for disabled children until the age of 17) in childcare costs.

The scheme is open to all qualifying parents including the self-employed and those on a minimum wage. The scheme is also available to parents on paid sick leave as well as those on paid and unpaid statutory maternity, paternity and adoption leave. In order to be eligible to use the scheme, parents will have to be in work at least 16 hours per week and earn at least the National Minimum Wage or Living Wage. If either parent earns more than £100,000, both parents are unable to use the scheme.

The earnings limit does not apply to newly self-employed who started their business in the last 12 months. In addition, as self-employed income can vary, profits can be averaged across the tax year if it is necessary in order to meet the minimum income requirement.

Junior ISAs

Junior ISAs were introduced to encourage parents to save money for their children and to provide an alternative to the Child Trust Funds (CTF) that were only available to children born after 31 August 2002 and before 3 January 2011. It is possible to transfer CTF funds to a Junior ISA.

Junior ISAs were made available in November 2011 after CTFs were phased out. However, unlike the CTF accounts, the government does not contribute any public funds. Investments are available in cash or stocks and shares and a child can have one or both types of Junior ISA.

The money in the account belongs to the account holder. The child can control their account from the age of 16, although any money saved cannot be withdrawn until they turn 18. Junior ISAs automatically turn into an adult ISA when the child turns 18.

Any income from CTFs or Junior ISAs is exempt from Income Tax and CGT on the child or the parent even where the invested funds came from the child’s parents. The current subscription limit for both CTFs and Junior ISAs is £4,368. It has been confirmed that the limit will increase to a generous £9,000 from 6 April 2020.

Tax treatment when transferring income streams

Special rules apply to transfers of income streams. The rules make it clear that the sale of an income stream – designed to turn economic income into a return that is treated by tax law as capital – is unlikely to work. For example, shareholders could sell the right to receive a large company dividend in exchange for an amount almost equal to the dividend, without selling the shares. Legislative is in place to ensure that the Income Tax payable on such a receipt cannot be avoided.

The transfers of income streams legislation ensure that receipts derived from a right to receive income (and which are economic substitutes for income) are to be treated as income for the purposes of Corporation Tax and Income Tax.

Where the transferee is a company, it is taxable on its accounting profit from acquiring the income stream. This will generally be the difference between the cost of the income stream and the amount of income it actually receives. There is no similar relief or special treatment for non-corporate transferees. The legislative provisions do not apply under certain limited circumstances.