Comments noted, Rebecca. However, I'm still not convinced that HMRC has "altered" its guidance in any meaningful way. I think the GOV.UK "Idiots guide" was merely updated to reflect the restriction to basic rate relief from April 2017. Yes, there's a reference to wholly and exclusively in there but that has ever been thus for a trading concern, which is how the rental profits have to be calculated; so, for my part, I can see nothing new there.
As I see it, it's simply a case of an ill-informed/trained Revenue officer who has made the classic mistake of taking the Idiots Guide as Gospel. And having painted him/herself into a corner doesn't have the good grace to concede. Sad to say, this happens all the time and with increasing regularity as all the properly trained Revenue staff reach retirement age. Lord help us when MTD comes in!
I am an avid follower of Rebecca Cave's articles but there are two stand-out things I would take issue with here. Firstly, the heading: "HMRC altered guidance to deny interest relief". No they didn't! BIM45700 is still there; as has been mentioned it's the dumbed-down GOV.UK guidance which is inadequate (although not actually wrong, I would argue).
Secondly, there is a paragraph headed "HMRC Backs Down" followed by these words: "HMRC are still not backing down." Say that again??
I think at the heart of the issue is the fact that the majority of trading businesses (even quite small ones) have a balance sheet and the proprietors capital account is therefore visible. However, in my experience the vast majority of rental businesses do not have a balance sheet; and even if they do, this is not captured in the Land and Property pages and so is not visible. This is a recipe for confusion and misunderstanding, even if you are dealing with a competent, well-trained HMRC Officer which, sadly, these days is a rarity.
It wasn't that long ago that HMRC were running an advertising campaign with the strapline "Tax doesn't have to be taxing". Yes, indeed - thank God we don't have to hear it right now!
As an aside, it's all very easy to pin the blame on George Osborne for this state of affairs but I'll bet an pound to a penny that he merely rubber-stamped a "cunning plan" that was put to him by senior Revenue officials. HMRC have form in this area. Remember the hideously complicated methodology brought in to cap pensions tax relief about 6 years ago? Not to mention the fiasco-like Nil CT starting rate band, back in Gordon Brown's day. Plus ca change and all that!
But, but, but...
....how does this square with the guidance in HMRC Booklet 480, para 21.24 (reproduced at the end of this posting)? This states that a full deduction will be due for cost of a flat etc if it is cheaper than a suitable hotel. More to the point, it also states explicitly that an apportionment may be allowed where, for example the employee's family reside in the flat etc.
To answer my own question, although I haven't read the full case report, I believe Tim Healey's appeal concerned what I still call a Schedule D Case I deduction, rather than an employee under what I still call Schedule E, who would have claimed under s336 of ITEPA. But, given that the Schedule E rules are notoriously stricter than the old Schedule D ones, it does seem rather an absurd state of affairs that you end up with a better outcome as an employee! Perhaps Mr Healey needs to work through his own service company?!
If accommodation is provided for an employee, for example, in a flat or hotel, while the employee is on business duties away from his or her home and normal place of work, the cost of this may be allowable as a deduction under the expenses rule. For example, a company in Yorkshire may rent a London flat for an employee who has to make frequent business trips to London. The extent of any deduction will depend upon the circumstances. If the accommodation is no more than an alternative to hotel accommodation and is not available for private occupation the whole cost of renting and running the flat may be allowed as a deduction. On the other hand, if the employee or his or her family also had the use of the flat as a private residence any allowance would be restricted.
Provided living accommodation will never be included in a dispensation and so even if there is a potential deduction under the expenses rules, the provision of the accommodation must be reported on form P11D each year.
It comes from the top!
I was at the PFP Tax Investigations conference in London in November and the guest "external" speaker was Dave Hartnett. During questions after his session I referred to the fact that an SA penalty notice was issued within 2 weeks of the filing deadline and not much longer than that for a late CT return. I asked why, then, did it take four months to issue a P35 penalty? (And likewise, I may say, for a P11D penalty notice.)
Mr Hartnett's flippant and indeed rather arrogant remark was that it was because the computers were programmed to do so! Some delegates thought this rather amusing and laughed. But far more hissed! I reminded Mr Hartnett that the Tribunals had roundly criticised HMRC for what was seemingly a deliberate policy of "penalty multiplication". As one contributor has mentioned, the penalty is in reality really £500 because the notices are sent out by snail mail and there isn't time to stop another month accruing! Mr Hartnett simply ducked and dived on this point! (I see that he is to stand down as permanent secretary later this year.)
I am not instinctively anti-Revenue - in fact I was an Inspector of Taxes for many years. But I would hang my head in shame if I worked there now!
Personally, I suspect that the problem lies with a flaw in the programming of the PAYE computer rather than a more sinister plot to deliberately multiply the penalties. When these penalties first starting flying around three or four years ago I had an email exchange with a senior Revenue official responsible for the system and he came close to admitting this.
But I do find it infuriating that there seems to be no will to tackle this issue and that top officials like Dave Hartnett and Sue Walton continue to try to defend the indefensible. What we need is a Truth and Reconciliation Commission!
I'd like to applaud and support Paul Soper's incisive posting. I get irritated when I see the lay press refer inaccurately to Non-doms but it is really unpardonable for AWeb editors and even respected contributors like Simon Sweetman use the same sloppy language. "Non-doms" is one of those trendy 21st Century pieces of journalese which was originally coined to describe people like Abramovich and Al-Fayed, that is to say foreign-born individuals who have made their home in Britain. Unfortunately, in the last few years it seems to have morphed, by misuse, into a term describing what Gina Dyer calls "wealthy tax exiles" (but under the heading "Nail in the coffin for Non-doms"). Gina (and others): wealthy tax exiles are nearly always "Doms" - that is, they are Brits who have moved abroad, often for tax reasons. They are the polar opposite of Non-doms!
Having got this off my chest, there is unquestionably a pressing need now for legislation to determine a person's residence. HMRC seem to focus on indivividuals who go abroad to work on a full-time contract of employment that lasts a complete tax year. (Where is that in the legislation, by the way?) But I have had clients who go abroad for less than that but whose tour of duty is extended and they do end up being abroad for a full tax year. But are they entitled to claim split year treatment back to when they first left? You tell me - I can't find a Revenue officer who can. And this is without considering the vexed question of NICs.
I had another client who really was a non-dom and who used to spend over 6 months a year in the UK. But over the years her visits gradually declined so as to be less than 91 days on a rolling four average (again, where do 91 days and 4 years come from?!) I treated her as NR/NOR from 6 April in the first tax year that she went under the 91 days average. I disclosed this in her return and it wasn't challenged by HMRC but I'd be a bit worried repeating that, post Gaines-Cooper, as she never really left the UK "for a settled purpose".
The so-called rules in HMRC6 and, before that, IR20, are merely the Revenue's interpretation of ancient tax cases where, for example, a wealthy American would cross the Atlantiuc by liner and stay 6 weeks in his shooting lodge. The old midnight rule (when both days of arrival and departure were ignored in the days counting test) was another such interpretation, now superseded by legislation. With the ease of transport and modern communications people are living much more multi-national existences than they used to and tax law needs urgently updating to reflect this.
Don't companies have human rights, too?
My practice has received about ten of these wretched things. Some clients have received two - one for P35s and one for non-filing of a CIS36. This is even when the company is not operating in the construction industry. Who knows how the Revenue think a NEW company is within CIS.
Some were incorporated in 05/06 but only began trading (if at all) in 06/07. Clearly, no effort at all has been made to check whether a return was actually required. The problem, as many contributors have identified, is that this accursed system is now all done by computer, but with inadequate numbers of support staff. It is almost impossible to find anyone in the Revenue to "reason" with. If you, do, one finds that they are beyond reason, acting on their Head Office instructions.
One of our clients had a £900 penalty imposed for 04/05 because the P35 was e-filed but the CIS36 - which has to go by paper - allegedly was not. After appealing, and months of exchanges, the matter is now being listed for the Commissioners! I'm going to take it on a point of principle. There is an argument that an incorrect return was made, not a late one, in which case, the penalties are tax-geared, and there's no tax outstanding.
Even if this fails, it must be a basic human right to KNOW - or rather, be accused of - being in a default situation, and be given the opportunity of correcting any default. It's like a traffic warden writing out a parking ticket but you not being sent it until months later, by which time the fine has tripled!
Finally - and this really gets my hackles up - as I sit here and type this there is a flashing banner on the side of the screen which I accidentally put my cursor on. It opens an HMRC weblink which begins with
"HMRC is committed to helping you run your business. We've improved our Online Service so you can cut down on paperwork...." I couldn't read any further! I would seriously urge AWeb to "pull" this advertisement on the grounds of misrepresentation.
I spent a happy 20-odd years working in the Inland Revenue, half of them as an Inspector, and I am so saddened to see what has happened to a once-proud Department. What a complete and utter shambles it has become! Can you imagine what it will be like when the new CIS scheme MONTHLY penalties come in with effect from next month?? Saints preserve us!
A case of stating the obvious?
As someone who advises on cars vs cash I would like to endorse and elaborate upon Alastair's comments.
I have lost count of the number of car vs cash exercises I have carried out for clients since the current rules came in, but it must run into hundreds. Many of these come out with results that show that the vehicle under consideration would be best run as a company car; many more show the opposite. Usually it is the client company who has asked for the advice and their stance is normally that they will pay a cash alternative, and the business mileage allowance that goes hand-in-glove with it, as long as this costs no more than running a company car.
In the majority (but not all) of these cases, where a cash alternative is beneficial to the director/employee, the driver will indeed come out of the company car scheme. As Alastair says, the cash allowance is subjected to PAYE, plus E'ers and E'ees NI: this is simply invisible to the Revenue. Where it is cheaper to run a company car the Revenue will not notice any change. So, the only people switching out of company cars are those who deem it beneficial to do so, so the Revenue's statistics can only point in one direction.
This was always envisaged in the consultations and preamble which preceded the introduction of the current scheme. The Treasury claimed at the time that this was to be anticipated and that the CO2 tariff had been set at a level which took this into account and that was therefore revenue-neutral.
Maybe they got this a bit wrong - there has already been a 1% uplift in the tariff after the three year phasing in period and there is set to be another one by 2008. The 3% discount for Euro IV diesel has also been withdrawn. But if they are basing their sums on a perceived loss of tax because of the lower number of company cars then this is a self-fulfilling prophecy. The more expensive company car tax becomes, the more people will switch to a privately owned car. It would be better if the Revenue conducted a survey into how much tax and NICs they have harvested through car allowances!
In my opinion a far bigger loss of tax has resulted from the mass exodus from "free" company fuel. Even at the present high pump price levels, it is still far cheaper in the vast majority of cases for the employer to pay a fuel cash alternative. (In some cases the tax on the fuel scale charge is itself more than the cost of the fuel!) This is truly a case of Government greed killing the golden goose - if the provision of private fuel were taxed more "fairly", then people would not have opted out of the fuel scale charge in their droves. C'est la vie!