Open Letter to HMRC – Clarification of “BUSINESS”

by Neil Patterson

11:28 AM, 20th June 2017
About 3 years ago

Open Letter to HMRC – Clarification of “BUSINESS”

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Open Letter to HMRC – Clarification of “BUSINESS”

Today Property118 Limited sent the following open letter to HMRC. 

To Whom It May Concern

Property118 Limited is an online UK forum for private housing providers (landlords). Last year, our forums facilitated over 5,000,000 unique user sessions and this year that figure is expected to almost double. Our mission is to facilitate the sharing of quality information (from source wherever possible) and best practice in the UK private rented sector.

From the sheer volume of questions posted on our forums it is clear that ambiguity exists within legislation and HMRC’s guidance notes in what constitutes a private rental business. We would very much appreciate it if you would provide clarification.

The importance of this clarification is that thousands of landlords are considering incorporation. Whether or not incorporation relief is applicable to them [s162 TCGA 1992] is of paramount importance to them.

We have read the following but still cannot find a clear definition of how HMRC determines whether a landlord is running a business: –

  • The Upper Tribunal ruling in the case of Elizabeth Moyne Ramsay v HMRC in 2013
  • HMRC internal manual, National Insurance Manual “property letting: business for Class 2 National Insurance Contributions” Section 2(1)(b) SSCBA 1992
  • TCGA 1992 section 162
  • FA03/SCH15/Para 18 & Para 20
  • SDLTM33000 onwards
  • S1(1), S45 Partnership Act 1890, Sch1 Interpretation Act 1978
  • Capital Gains Manual CG65700

The ambiguity stems from the 2013 Upper Tier Tribunal case of Ramsay v HMRC, the issue in the case being whether Mrs Ramsey’s rental property business constituted ‘a business’ for the purposes of claiming incorporation relief s162 TCGA 1992.

In 2015 HMRC updated its manuals for National Insurance Contributions in 2015 [NIM23800], which provided four examples on how HMRC would consider landlords as being eligible (albeit not compelled) to pay Class 2 national Insurance contributions on the basis of being regarded by HMRC as a business. Reference to the word business is frequently used in this manual, but the examples quoted seem extremely ambiguous to us, for the reasons below.

HMRC EXAMPLE ONE

“Samantha lets out a property that she inherited following the death of her great aunt. This will not constitute a business.”

We ask why not?

Ownership of residential property, which is made available for letting, (even if it is only one property) comes with accountability for over 180 pieces of legislation. If Samantha owned the property in a company, the requirements for ongoing due diligence would be no different.

Please consider the following analogy. If Samantha had inherited a motor vehicle and decided to rent it out on a six-month contract in return for money, she would be running a business. The rental vehicle be would treated as an asset of that business. So why is making money from renting out a property any different? Note that Samantha could rent the vehicle to either a private individual or a company, subject to status and referencing, and the basis of whether she would be deemed to be running a business would be no different.

Furthermore, if Samantha decided to expand her business, by borrowing money, to purchase another vehicle for rental, she would be allowed to deduct 100% of the finance costs from her rental income regardless of whether she is a private business or incorporated. As a landlord though, she would will increasingly be unable to claim finance cost relief but would be able to do so as a company. This is one of the many reasons landlords now feel they are being herded into considering incorporation and need clarification of the rules applicable to incorporation relief, specifically what constitutes a business.

HMRC EXAMPLE TWO

“Bob owns ten properties which are let out to students. He works full time as a landlord and is continually seeking to increase the number of properties he owns for letting. Bob is running a business for NICs purposes.”

We concur.

HMRC EXAMPLE THREE

“Claire owns multiple properties that are let. She spends around half her working time carrying out duties as a landlord and is not looking to increase the number of properties she owns. If the only duties that Claire undertakes are those normally associated with being a landlord, then this would not constitute a business.”

Why not?

Please see our point in response to example one. Many businesses are initially operated on a part time basis until such time as it becomes viable for the business owner to quit their salaried job. Why are landlords any different?

HMRC EXAMPLE FOUR

“Hasan purchases properties using “buy to let” mortgages. He places all letting duties in the hands of a property letting agent who acts as landlord on his behalf. If the only duties that the property letting agent undertakes for Hasan are those normally associated with being a landlord, then this would not constitute a business.”

Why not?

Please see our responses to example one and three and please consider the following analogy. When Richard Branson started Virgin Airlines it was not his sole occupation or business. He didn’t own his first aircraft and he certainly didn’t fly or service it. If we follow HMRC’s logic in example four then it would be logical to assume HMRC would not perceive Mr Branson to be running a business.

Regardless of whether “Hassan” manages his own properties or not, he is still accountable to the legislation associated with letting residential property. If he chooses to take the risk of subcontracting some of the day-to-day running of his business, for optimal efficiency, this does not absolve him from accountability, so why would HMRC perceive he is not running a business? Would a plumber who subcontracts gas related work, because he is not qualified by Gas Safe, be deemed not to be running a business?

We respectfully request your permission to publish your response to this request for clarification in open forum.

Yours faithfully

Neil Patterson – Managing Director

Please send me a link to the HMRC response

HMRC have 28 days to respond. If you would like to read their response, please complete the form below and we will email a link to a PDF to you as soon as the response has been received and is scanned into our system. There is NO CHARGE. We will send you an email to confirm that your interest has been noted. If this doesn't arrive in your inbox within a couple of minutes please check you junk/spam email folders and whitelist us for emails.


Comments

Mervin SX

13:26 PM, 20th June 2017
About 3 years ago

Neil,

Why are you trying to get clarity (or assertion) from HMRC whether letting a property constitutes a business? I appreciate this could help with incorporation relief, etc. But how about those landlords who are not interested in incorporation? Wouldn’t making all property lettings a business, force thousands of landlords to pay Class 2 NIC (if they aren’t paying any NI now)?

My comments are also aimed at another article published by Mark Alexander – https://www.property118.com/joint-buy-let-owners-automatically-business-partnership-sdlt-exemption-purposes-incorporation/99166/

I’m not criticising either of the posts but somehow I have a feeling that we may end up shooting ourselves (for those landlords who don’t pay NI).

Happy to be educated otherwise.

Regards,
Mervin SX

James Fraser

13:28 PM, 20th June 2017
About 3 years ago

Brilliant letter. Perfect. Let's see how little they respond to it!

Mark Alexander

13:31 PM, 20th June 2017
About 3 years ago

Reply to the comment left by "Mervin SX" at "20/06/2017 - 13:26":

Hi Mervyn

We already have clarification on the Class 2 NI point. Even if a landlord is eligible, payment is optional, unless that landlord also engages in a trade.

Please see https://www.property118.com/landlords-class-2-national-insurance/99432/
.

Mervin SX

13:37 PM, 20th June 2017
About 3 years ago

Reply to the comment left by "Mark Alexander" at "20/06/2017 - 13:31":

Thanks Mark - a very prompt response!

For clarity - what does this statement mean "Where the letting business is also a trade because it includes more than property letting..." ? Could you give me an example?

Mark Alexander

13:44 PM, 20th June 2017
About 3 years ago

Reply to the comment left by "Mervin SX" at "20/06/2017 - 13:37":

Yes of course, here's an extract from a Tax Faculty article on the ICEAW website ...

"A landlord is a self-employed earner, potentially liable to both Class 2 and Class 4 NICs if the activities amount to a trade for income tax purposes. This could include, for example, receiving income from other services such as providing a bank of washing machines in a multi-occupancy block that is rented to tenants, or providing an ironing service to tenants. Running a guest house or hotel will also usually amount to a trade for income tax purposes, so an individual proprietor will be a self-employed earner. This did not change at 6 April 2015."

Source: https://ion.icaew.com/taxfaculty/b/weblog/posts/propertylettingandnationalinsurance
.

MoodyMolls

15:07 PM, 20th June 2017
About 3 years ago

Yes the reply will be interesting. I thought it related to some old land rule why it was not classed as a business.
I think it should be classed as a business and would prefer Ni to section 24.
Just hope Hammond doesnt think he could sqeeze the extra money and we get Ni and S24

Chris Cooper

18:36 PM, 20th June 2017
About 3 years ago

I would be interested to hear their explanation. I suspect it will include many of the explanations we have all been sent previously, including that the income derived from property is principally derived from the interest in the land.

I think one of the reasons we have never received straight forward, honest responses which actually address the arguments we make is because there aren’t any. It also occurs to me that the Treasury has such immense power they can set the the tax rules in any way which supports the economy (in their opinion). Hence the weakest part of our JR case was the Human Rights aspect. Governments have a large margin of appreciation when setting tax rules i.e. they can do what they want, so long as it’s proportionate. Of course we don’t think it’s proportionate, but the people in a position of power seem to.

I have always thought we are missing something. Perhaps we’re not - maybe it really is a simple as raising revenue from a community who they think can afford it as well as changing behaviour e.g. paying down debt, so that when interest rates increase fewer people are exposed. As an aside, but it may have a bearing on it - the average age of a Treasury employee is twenty seven. It probably means that the average Treasury employee is part of Generation Rent and, unfortunately, in a position to influence policy in their favour.

Doesn’t mean we shouldn’t give in though and continually look for new avenues and strategies to have S24 scrapped or amended.

Heather G.

19:56 PM, 20th June 2017
About 3 years ago

Great letter, thanks. I look forward to their response. On their example #2 I wonder why his future plans are mentioned - how can 'plans' seem to define if you are crrently running a business? Similarly, in example 3, why does Claire's plan not to increase her portfolio have any impact on deciding if she's running a business? They say "If the ONLY duties... are those normally associated with being a landlord" it's not a business - they obviously have no idea what is entailed in carrying out our duties as landlords. As I understand it, when Making Tax Digital comes in this will mean Calire will be doing individual tax returns for each property FIVE times a year, in addition to doing Right to Rent checks and all the other compliance and management functions - she's going to be spending a lot more time just doing the accounting for HMRC! Finally, how can spending 50% of WORKING time ie about 20 hours per week (do they include travel time?) not be classed as a business? If so, why do they use the words "working time" if it's not work and therefore a business?

Daren Peacock

8:35 AM, 21st June 2017
About 3 years ago

Unfortunately, there is no consistent definition of the meaning of 'business' for tax purposes - it depends on the context in which is it found - it is an etymological chameleon. Of course Section 264 ITTOIA 2005 describes letting as a 'UK property business' for income tax purposes but that is not to say it is a business for Section 162 TCGA 1992 incorporation relief purposes. There ought to be consistency but this is not how the Tribunals approach the issue.

Mark Alexander

8:41 AM, 21st June 2017
About 3 years ago

Reply to the comment left by "Daren Peacock" at "21/06/2017 - 08:35":

Are you aware of any Tribunals where HMRC have challenged a s162 TCGA claim on the grounds of the landlord not being a "business" since the Ramsay case?

To our knowledge, there have been none.
.

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