Open Letter to HMRC – Clarification of “BUSINESS”Make Text Bigger
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.”
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.”
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.”
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.
Neil Patterson – Managing Director
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