AirBnB UK Ltd have made a statement in their accounts for the year to 31 December 2019 that they will share data about their hosts with HMRC. It is a known practice that HMRC has the power to obtain tenant details from estate agents. A great leap of imagination is not required to expect tax enquiries to follow from a simple matching exercise between the taxpayers’ history already available to HMRC and AirBnB host data. The tax penalty is lower when a disclosure is made voluntarily than when it has been prompted. There is an opportunity for AirBnB hosts to bring their tax affairs up to date without suffering increased penalty.
The sections below address some of the commonly asked queries that are likely to result from this.
Rishi Sunak announced a new raft of support measures in the Commons this afternoon. The package is designed to avert an economic crisis triggered by tougher lockdown restrictions. A recent spike in Coronavirus cases has resulted in a 10pm curfew effective today. Social gathering restraints are expected to last six months. The Winter Economy Plan included mostly extensions to previously announced funding. The Chancellor also reference future tax rises to pay for the support, however any such announcment would no longer form part of the 2020 Autumn Budget. The Autumn Budget has been cancelled.
Jobs supported by the state must be viable. To prove long-term viability, the employee is required to work a third of their usual hours. The hours worked must be paid via payroll with income tax, national insurance and occupation pension scheme deductions calculated accordingly on that pay.
For the two thirds of the hours not worked, the government will pay one third. To clarify, the government will cover one third of 66% or 22%. The employer will also be required to pay a third of the hours not worked, or 22%. Therefore, the employer will be liable for one third, plus one third of two thirds, or 55%. The employee will receive 77% of their pay which is 22% from the government and 55% from their employer.
Reduction in working hours will differ, and the scheme is flexible to cover two thirds of the hours that are not worked. However, the government element of the support will be capped at £697.92 a month.
The employee will need to be on the payroll on or before 23 September 2020 to be eligible.
An employee can join, leave and, if necessary, re-join the scheme any number of times during the six-month period during which it will run. Unlike the previous furlough extension, the scheme is available to all UK employers. The scheme is open to employees even if they have not previously claimed furlough.
A larger business will only be eligible for the scheme if turnover has fallen resulting from Covid19.
The scheme is designed to encourage business to retain staff rather than make people redundant and thereby avert mass unemployment over winter when the current furlough scheme expires.
Employers would still be able to claim the previously announced Job Retention Bonus in addition to the job support scheme. The Job Retention Bonus is an award of £1,000 for retaining staff.
An employee cannot be made redundant or placed on redundancy notice for any period during which the employer is claiming the Job Support Scheme grant.
Self-employed income support scheme to be extended
As with previous Covid19 support measures, the government aims to be even handed with the self-employed and employed sectors of the economy. A further self-employment grant will be available to sole traders and partners in an unincorporated business from February 2021 until the end of April 2021. Businesses previously eligible for the self-employed income support scheme will be eligible for the new scheme.
It will be a requirement for business to demonstrate that they are actively trading but have experienced reduced demand because of Covid19. The new grant will cover the period from 1 November to 31 January. The grant will pay 20% of profits for an average month subject to a cap of £1,875 for the three months.
A second grant will be available to cover the period from 1 February to the 30 April 2021. Further information about the amount and nature of this grant have not yet been published.
Taxpayers with a liability arising in 2019/20 will have a further 12 months to settle this with HMRC. The usual payment deadline for tax arising for the year to 5 April 2020 is 31 January 2021. However, this liability can be paid over 12 months in equal monthly instalments. Provided the monthly payment plan is kept to there would be no late payment penalty or interest arising on the tax paid later than usual. The “Time to Pay” arrangement is a matter of negotiation between each taxpayer and HMRC.
Pay as you grow
Applications for the business bounce back loan will remain open until the end of November. The deadline had previously been set at 4 November 2020.
The loans which are intended to keep businesses cash positive through the era of depressed demand have been dubbed “pay as you grow.” Terms will be extended from 6 to 10 years, offering a facility for borrowers to cut their monthly repayment by almost one half.
During the term of the loan, it will be possible pause repayments for up to six months. The loan holiday will be available only once and provided at least six repayments have been made. It will be possible to enter three interest only payment periods. Each period would last six months.
The interest element of a loan can be deducted from taxable profits, whereas the repayment element is not tax deductible. As such, interest-only repayment periods provide both tax and cash benefit.
Reduced rate VAT for hospitality sector to be lengthened
The reduction in VAT rate from 20% to 5% for the hospitality sectors are to be extended to the end of March. Reduced rate VAT was due to expire on 31 January 2021.
A payment for services, which is also known as remuneration, can be disguised as a different sort of payment, such as a loan. The purpose of the disguise is tax avoidance. The practice is facilitated by an intermediary, usually mascaraing as an umbrella company.
Disguised remuneration schemes were prevalent since about the 1990s. However, successive anti-avoidance legislation and HMRC enforcement has ‘put out the fire’ at least to the extent that the practice is overt. It is estimated that about 50,000 people were handed correspondence from HMRC to settle tax on loans as old as 20 years. The loans were treated as being received on 5 April 2019. It is possible to spread the loan if the appropriate election is received by HMRC on or before 30 September 2020.
An employer can effectively outsource their human resource and payroll operation using an umbrella company. It is a third party to both employee and employer often closely linked to the recruiter.
Self-employed individuals pay less than an employee on the same income. The widespread practice of accountants facilitating companies for the self-employed, has provided cover for sham organisations to promise tax savings that seem above board. Furthermore, the prevalence of umbrella companies enables the sham to pay its clients via PAYE and thereby avoid explanation about the calculation of tax liability. The recent clampdown is welcomed by both HM Treasury and the tax profession.
The abundance of both contractor and umbrella companies in the open market has complicated the apportionment of culpability by the regulator between facilitator and end-user.
Tax justifications for a contractor company over unincorporated business was removed with the abolition of tax credit on dividends since 6 April 2016. A spate of sham umbrella companies followed to satisfy an entrenched expectation that companies could be used to save tax. Disguised remuneration campaign has subsequently deterred promoters of tax avoidance using loan payments as a substitute for employment earnings.
Recruiters often prefer to deal with contractors via a company. Where a contractor has been asked to provide services via a company, an intermediary offers to take on the administrate burden and tax dealings. That intermediary is commonly known as an umbrella company. It saves contractors hassle as compared to having their own company. The contractor is handed take home pay and a payslip, in much the same way as an employee. However, the tax paid by an employee using an umbrella company is higher than the for a self-employed contractor running their operation through a company.
Contractors working through an umbrella are usually taxed more than contractors using their own company. IR35 legislation, introduced in 1999, sought to tax as an employee any person who would be an employee but for a company. IR35 was an attempt to prevent the illegitimate avoidance of PAYE.
The 2007 intermediaries legislation introduced the term Managed Service Company. A managed service company is the legal definition of what are often marketed as Umbrella Companies. The regulation taxed workers of an umbrella company in much the same way as an employee. In 2016, the Supervision, Direction and Control (SDC) removed other tax incentives of using an umbrella company over being a direct employee, such as any tax deduction for commuting expenses.
Loan charge 2019
Introduced by the Finance Bill of 2016, an anti-avoidance provision was announced to redefine as income amounts previously defined as loan. It is referred to as the 2019 loan charge.
Many individuals who were identified as receiving loans were presented with a loan charge notice from HMRC by 5 April 2019. The disguised remuneration is treated as income of the payee. It can be treated as income of the employee on 5 April 2019. It is possible for the taxpayer to elect for the income to be spread over three years, 2018/19, 2019/20 and 2020/21. Usually a spreading election will be beneficial. A spike in income will likely cause a higher marginal rate of tax in the year of receipt. However, a scenario test of liability with and then without the election will determine the optimal outcome.
Employee’s and employer’s national insurance is usually deducted at source from employment earnings via PAYE. As previously discussed, the widespread use of companies and outsourced arrangements complicates the determination of complicity of end user with the disguised remuneration facilitator.
HMRC will attempt to recover NI from the employer or umbrella company. Effectively, the employer is required to account for the loan as PAYE earnings. An amount of loan that has effectively been treated as reclassified as employment earnings, and subject to PAYE, is not also assessed as loan charge via self-assessment. The aim of the government is to detect and prevent promoters of disguised remuneration.
Payment for services rendered will continue to be regarded as income for tax purposes. The spreading provision explained above applies to loans from a ‘November 2017’ settlement. The prevalence of contractor loan promoters and employers prepared to engage in schemes has declined significantly over the past decades resulting from HMRC enforcement.
Accelerated payment notices
Any cash flow incentive of the tax avoidance scheme is deterred via an accelerated payment notice. An accelerated payment notice is a mechanism whereby HMRC can request advanced payment where the tax liability of an organisation can be established by case law. It prevents tax avoiders from delaying tax through the appeals and tribunal process.
Individuals who are liable to tax on loan charges can also receive accelerated payment notices. Once the actual tax liability has been established it is possible to offset advances to HMRC from actual liability.
Purpose of disguised remuneration enforcement
The following remain valuable components of the UK economy:
The use of companies to limit liability in business transaction.
Accountancy service as a facility for business owners, freelancers and contactors operating via a company.
Payroll and human resource outsourcing via the umbrella company.
The use of legitimate business loans.
A tax incentive for people to chose self-employment over employment, to promote innovation and enterprise.
Enforcement directed towards promoters of disguised remuneration schemes will serve to protect credit within the tax profession. In turn, this preserves a market through which the consumer can plan their finances via tax efficient and legal manners.
The target of the government is to tackle disguised remuneration promoters.
Response to the call for evidence
In response to the call for evidence, legislators should recognise that there is an incentive within the tax profession to discourage the use of disguised remuneration. Eliminating rogue traders helps to preserve the credibility of tax advisers. That credibility has market value. Furthermore, removal of the tax avoidance market directs behaviour of people who are seeking to reduce their tax burden towards genuine self-employment for which the business of an accountant is often sought.
Enforcement can also be channelled through the professional bodies. However, this would be effective through reservation of the term accountant and tax adviser to those individuals usitable qualified. There has long been a call for the accountant title to be afforded similar protection for accounting work as to the title solicitor is for legal work. The term umbrella and accountant can be protected names by Companies House in much the same way as names such as: architect or charity. Umbrella company activities could require regulation.
It is beyond the scope of Coman & Co Ltd to advise on enforcement issues. Notwithstanding, protecting the word accountant and tax adviser would help to reduce non-compliance. Qualified accountants and tax advisers can be monitored by their respective professional bodies and peer reviewed by competitors. The terms accountant and tax adviser are used in ordinary parlance throughout the supply chain in which a disguised remuneration promoter could operate. It refers to that person who is experienced to advise on the credibility of a tax plan.
Over the weekend, Rishi Sunak has leaked plans for sweeping tax hikes to two British newspapers, the Telegraph and The Sunday Times. This is in part a response to the consultation on capital gains tax earlier in the Summer. The proposals are required to plug a hole in British finances estimated to be between 20bn and 30bn left by coronavirus.
The sharp 5% rise in corporation tax to 24% will bring it back to a level not seen since 2012. Historically, a “Small Rate Profit Limit” which from 1994 to 2015 was set at £300,000 created two tiers of tax rate based on profits with a gradual increase in rate from the small rate to the full rate.
The hope is that any rises in corporation tax will mirror this historical system of corporation tax. A blanket rise in the rate would result in a strong tax justification for operation as an unincorporated business rather than a company. This is because there is little tax difference between the two structures as it stands. The resultant disruption of disincorporation will be unwelcomed for small businesses and contractors, many of whom are trying to get back up and running after lockdown.
Capital gains tax
The other proposal was an increase in capital gains tax. The leaked report targets owners of residential property which is not exempted by principal private residence relief. This will mainly be landlords and owners of secondary property. A reduction in supply of rental property could bring about rises in rent at a time when the unemployment impact of lockdown is most sharply experienced - by the least well off.
The idea is to make gains taxable at the same marginal rate as income. This was broadly the system of tax in the UK from 1988 to 5 April 2008.
The final proposal, which affects tax relief on private pension contributions is possibly the least prudent. The consequences of disincentivising pension saving could be to increase the dependence of an ageing population upon the state.
A competitive advantage gained in the UK through less severe fiscal measures should be considered by the Revenue as an alternative strategy for debt reduction.
Likely the proposal will be effective from 6 April 2021 and so there is still time to increase pension contributions prior to that date.
For landlords and other property owners contemplating a sale, the following months could be opportune while demand is supported by a stamp duty holiday.
For contractors and other small business owners it is too soon to recommend moving the business out of a company. The announcement will almost certainly come in the Autumn Budget and there will probably be time to prepare arrangements ahead of the introduction of any new rules. It is likely that- in the current climate- the Treasury will seek to deaden the impact of any shock measures.
Many buy-to-let landlords purchased property in their own names or jointly with a spouse at a time when there was no restriction on the deduction of mortgage interest. At the point of purchase, the tax case was usually tipped in favour of private ownership. However, changes in cash flow requirements and in regulation has lent more credit to the proposition of using a corporation vehicle for the property. Bringing the discussion up to date, this article examines the case for transferring a property to take benefit from the stamp duty holiday.
Capital gains tax on transfer of property into a company
Leaving aside the tax implications of private ownership as compared with property ownership through a company, many existing landlords are put off by the proposal of transaction costs. The transfer is treated as a disposal for capital gains tax purposes and an acquisition for stamp duty purposes.
With London values moving little if anything since the referendum, the capital gains tax implication could be negligible. If the property used to be a former residence there could be a case for banking any PPR relief before it is further eroded over time. Principal private residence relief is so much of the gain as relates to the period in which the property was occupied. Therefore, the percentage time in which the property was the owner’s home reduces over time. Consequently, the tax-free portion of the gain reduces with every month that the landlord does not occupy the property. This is particularly punitive where prices are static or falling. At least in a rising market the amount of tax relief, in real terms, tends to rise.
Stamp duty on company purchasing property from a landlord
Stamp duty land tax (SDLT) on acquisition by the company is a further disincentive for landlords to transfer their existing stock into company ownership. However, this tax barrier is liifted by a stamp duty holiday, as announced by the chancellor, on properties with a value up to £500,000. The 0% rate of SDLT applies to purchases of residential properties between 8 July 2020 and 31 March 2021 inclusive.
In London, many ‘accidental landlords’ who let the first flat they bought will be well placed to benefit from the holiday.
Pitfalls of capital gains tax on eventual disposal
The main drawback to having a property in the company is the ‘double tax charge.’ When the property is eventually disposed of by the company, any gain would be subject to corporation tax. The rate of corporation tax is currently 19%. Extraction of that gain by the shareholder would be again taxed at 20%. The rate of 20% applies to the extent that the shareholder is a higher rate taxpayer. This is because shareholders of a property investment company are not eligible for entrepreneur’s relief.
Therefore, the landlord would be liable to personal tax at 20% profits after corporation tax. The CGT of 20% applied to post tax profits of 81% gives a resultant rate of 16.2%. The overall capital gains tax rate of 35.2% applies to disposal of investment property in a company. This compares to a tax rate of 28% on disposal of the property which is not transferred into a company.
Tax savings on mortgage interest
There is a restriction on the deduction of mortgage interest from taxable profits. From 2020-21, only 20% of mortgage interest is available as a tax reducer. By contrast, mortgage interest can be deducted from company profits in full. The mortgage interest reduces both corporation tax and income tax, because it lowers funds that would otherwise treated as dividends.
To the extent that the landlord does not have other dividend income, the dividend allowance of £2,000 would be available to further reduce income tax exposure. Where the landlord shares household bills, for instance with a spouse or other cohabitee, it could be practical to add that person as a shareholder and further extend the £2,000 annual exemption from income tax. To the extent one shareholder is a higher rate taxpayer, the dividend of £2,000 would otherwise be taxed at 32.5% or £650. Further savings could be achieved within the limit of one shareholder being a basic rate taxpayer and the other not.
The shareholder could also consider accumulating funds in the company to be extracted as a capital gains on disposal of the company. This strategy carries a cash flow penalty but brings about eventual savings of 10% personal tax.
A prospective landlord weighing up a transfer of property should consider the increase in annual accounting cost associated with operating the investment via a company. Coman & Co provides fixed fee pricing for a limited company.
The tax points outlined in this paper are based on current rates. The Chancellor has ordered a review of capital gains tax. In general, where tax planning spans more than one tax year the rates above can change. Once issue to consider is that the tax regime for properties owned by companies could change, and market conditions (or tenancy agreements) may be such that it is not possible to close the company in time to escape any such changes.
Where the landlord owns more than one property, consider one company per property. The reason is that cash from any capital gains can be extracted without having to sell both properties. Accounting costs will increase incrementally with the number of companies used.
Where the strategy is to reinvest rather than to extract cash for other purposes, a company carries the additional benefit that the capital gains tax is limited to corporation tax.
A company is better suited to property that is expected to have high yield but less capital appreciation. History shows that prestige locations, for instance in London, tend to outperform in times of growth. Holiday lets, houses in multiple occupation, bedsits, student accommodation and Airbnb tend to produce higher yields. Where the proposition is closer to a bed and breakfast or hotel there is even the possibility of keeping entrepreneur’s relief intact which adds to the tax case for a corporate structure.
A company could be better suited to a consortium type arrangement where a greater portion of each member’s share is below the dividend allowance.
Company owned property could lend itself well to the passing of wealth down the family line or among family members. The company provides a mechanism for ownership portions to be changed without affecting the land title. The tax permutations widen with the number of members involved.
Tax advisory service
Coman & Co can estimate the tax impact of different scenarios with which to inform decision making in this area. Some basic forecasting can be carried out for no additional charge.