Any answers answered: Landlords and self-employment. By Nichola Ross Martin
H M Revenue and Customs (HMRC) published a new set of guidance notes – I mentioned it last week, they are called "Finding out about tax regulations" and are to persuade people who may not have considered that they have taxable income to come and join the "tax club".
Accountingweb member, Judy, was confused by one part of the guidance which goes as follows:
“Your liability for NICs as a landlord depends upon whether you would be regarded as 'gainfully employed'. If you take an active part in running the business such as cleaning and decorating the properties in return for receiving rental income then you are probably a self-employed earner and liable for Class 2 NICs. If, however, you do no more than let out the properties and receive the rental income from them then you would be regarded as non-employed for NICs purposes and there would be no Class 2 liability.”
She posted to the Any Answers forum that her understanding was “that letting property was not self-employment, unless it was holiday letting.” Adding, “I have several clients who let properties, and some of them do their own decorating and repairs. The above guidance seems to imply that they may be trading. Is this something new? Or have I been treating them incorrectly by just filling in the Land and Property pages on the tax return?”
I can see exactly what Judy means here, in fact I think you could quite easily form the conclusion that you may need to register for Class 2 NI as a self-employed "employed" landlord when you need not. What we have is a slight new take on the NI rules from HMRC though, and no changes to the basic taxation of landlords. I add there is no change of interpretation here; the points are just not presented as clearly as they might.
Now that we have the Income Tax (Trading and Other Income) Act 2005 (ITTOIA) in place, Sch A (rental businesses) has disappeared. From 2005/06 Sch A is now termed as “property business”, and treated very much like a trade in terms of expenses, but that is where the similarity ends. On some occasions it is still necessary to determine whether a business which consists of generating income from property is a trade or not. The rule of thumb is that certain rental businesses are treated as trades, for instance:
- Rents received by hotels, guest houses, boarding houses, ed and breakfasts (B & B), holiday parks and furnished holiday lettings businesses not derived from tenancies
- Rent received by a lessor of tied premises is also treated as a trade receipt.
- A trader who lets off part of his business premises may be allowed to include the rents as trading receipts and taxed with his trade profits if the following conditions apply:
1. The let accommodation is temporarily surplus to current business requirements. It must previously have been used or is intended to be used in the business. Trade treatment is not appropriate where it is evident that the premises have become surplus to business requirements other than temporarily.
2. The individual premises are used partly for the business and partly for letting, there being no question of apportioning outgoings when a whole premises is let.
3. The rental income is comparatively small, with the result that the actual tax liability approximates to the strict statutory liability; and
4. The rents derive from surplus business accommodation only and not from land.
The effect of including rents in the trading business computation are that they are earned income for income tax purposes, and this correspondingly means that National Insurance will also apply.
It is not always clear cut as to whether something is a trade or not, and this probably why the confusion exists, it is possible that taxpayers who are claiming rent-a room relief, are actually operating a B & B, for instance. Member Khushal Napal recommended that Judy should look at booklet IR223 and this explains the conundrum:
Some lettings may amount to a trade. This is likely to happen where you run a guest house or bed and breakfast business, or if you provide material services, for example, meals and cleaning. If your lettings amount to a trade, Rent a Room relief may still be claimed, but you should exclude any assessable profits from your rental business and return them as trading profits.
So HMRC’s advice is not totally wrong, it is just a bit confusing. Do not be surprised if most new landlords will think that they must register with HMRC within 3 months after reading it. This is of course only the case if you are trading and have a NIC liability.
All the information is there on the new HMRC web pages, it is just that the vital part (leaflet IR223) is not linked into the NI advice. It is a question of knowing exactly what you want and where to look for it. HMRC's website once one an award, and it is still pretty impressive, but we are now suffering from a case of too much information. It certainly needs a spring clean before anymore guidance of this nature is added.
Thank you very much for drawing this to our attention Judy, I can see that it will purplex some clients too.
Link to HMRC's "Finding out about tax regulations"