HMRC are now leveraging income tax ‘no profit’ self-assessments made between 2017 and 2020 to identify a larger group of taxpayers subject to annual tax on enveloped dwellings (ATED) that might have historic unmet ATED obligations (set out below) or incorrectly claimed ATED relief.
Brief overview of ATED
ATED applies to ‘non-natural persons’ (i.e. companies) (taxpayer) owning single dwelling interests with a value of £500,000 or more (dwelling). ATED runs from 1 April to 31 March (chargeable period) and annually obligates the taxpayer to pay the tax due, as determined by the market value of each dwelling, until the taxpayer is no longer subject to ATED. However, filing an ATED relief declaration return (RDR) relieves the annual charge provided that the conditions of the relief claimed are met.
ATED property rental business relief (PRBR)
HMRC’s attention is currently on ATED PRBR. Broadly, ATED PRBR should be available to the taxpayer provided that it exploits a dwelling for receipts (e.g. rents) or is taking steps to secure (without undue delay) the dwelling to be exploited, in the course of carrying out a property rental business; that business has to be run on a commercial basis and with a view to profit. In addition, no individual connected to the taxpayer can be permitted to occupy the dwelling.
HMRC have provided examples in the ATED guidance of when a property rental business is not “run on a commercial basis” which include tenancy and business debt arrangements that are not at arm’s length, and not using independent agents to identify tenants. The ‘view to profit’ test focuses on there being a serious intention and realistic expectation of profitability earnings from the property rental business (or other relievable activity). This test can still be satisfied even if the actual result is a loss. But perhaps HMRC’s campaign may change this position.
Nudge letter ready?
It is important to remember that the ATED self-assessment is fact sensitive and the business activity in the preceding and subsequent years of the chargeable period being assessed will be considered in HMRC’s assessment. Therefore, a pro-active ATED diligence is advisable, including checks that HMRC hold correct correspondence information and/or agent authorisation forms.
Taxpayers have 40 days to respond to nudge letters to avoid HMRC making a discovery assessment to recover any perceived loss of tax, penalties and interest, per dwelling subject to ATED.
Companies within scope of ATED prior to 2020
We assume HMRC are targeting taxpayers to check the commercial viability of the business for ATED purposes prior to the COVID-19 pandemic in 2020. As such, companies should re-visit the 2017 to 2020 years to identify which year(s) were loss making and noting the parallel ATED filing position taken.
Where tax was due, the ATED filings and payments should be made. If ATED PRBR was claimed, companies should consider collating the contemporaneous evidence to support its eligibility for ATED PRBR during these years in anticipation of being issued a nudge letter.
Companies within scope of ATED post 2020
We expect HMRC will still review income and corporation tax returns from 2020 onwards for ATED purposes. Therefore, companies should conduct the same diligence task suggested above retaining such records and, where required, make ATED filings and payments if due.
Going forwards
Whilst the ATED return/RDRs only require minimal data, thorough review and record keeping is imperative for each ATED filing made. A taxpayer may need such evidence in the event of a future HMRC challenge or, possibly, for the purposes of a future disposal.
If you have an ATED query or would like assistance with ATED compliance, please contact the authors or your usual KPMG in the UK contact.