In the Chancellor’s 2018 Budget, new criteria were introduced in relation to Entrepreneurs’ Relief (ER)…
Don’t Forget About ATED!
It is April once again, which these days as well as meaning the end of one tax year and the start of the next, can also mean that it is time for accountants and tax advisers to consider whether ATED (Annual Tax on Enveloped Dwellings) returns are due on behalf of their clients.
Whilst most practices will have become familiar with the usual filing requirement and will be submitting ATED returns as necessary for the 2019/20 year, there will be some who still need to get to grips with the regime and ensure that clients who are affected comply as necessary.
This article is written to serve as a reminder regarding ATED and also touches on the changes brought in from 6 April 2019 along with the proposed changes to the non-resident landlord regime for corporates being proposed from April 2020.
When is an ATED Return due?
Generally speaking, the ATED regime applies to residential dwellings in the UK valued in excess of £500,000 that are owned by a company or within a corporate wrapper or ‘envelope’. This includes partnerships with a corporate partner (member).
ATED was introduced in 2013 to deter tax avoidance via the holding of UK property through the use of certain structures including non-resident companies. The original threshold was set at £2million, meaning that returns were only required where properties were worth in excess of this. The threshold was then reduced to £1million from April 2015 and subsequently to £500,000 from April 2016. This clearly had the impact of widening the scope of ATED considerably. Offshore companies are subject to ATED in the same way as UK corporates.
A ‘dwelling’ is defined as ‘a distinct unit of residential property (i.e. a house or flat which is considered as one residence)’. ATED can apply to property which is suitable for use as a dwelling, not just a property which is actually so used.
The interest in a property, known as a ‘single dwelling interest’ within the legislation, is valued on acquisition or at other key dates, such as on a part disposal or on renewal of a lease for example. Therefore care needs to be taken as interests can drop out of or fall into the ATED regime as a result of one of these key dates and missing the filing deadline of a return will mean penalties for late returns and late payment if an ATED charge is due.
It is also necessary for properties to be revalued at 5 yearly intervals at set dates, following the date of acquisition; the initial date for ATED valuations was 1st April 2012 and following on from that valuations at 1st April 2017, 1st April 2022 etc are necessary. There is no need for a formal valuation to be obtained each time, but of course HMRC can challenge a valuation which they believe to be significantly different from the open market value of the single dwelling interest, which is the basis that should be applied.
Annual ATED returns need to be filed with HMRC by 30th April each year; note, even though relief from the annual ATED charge may be available (as detailed below, depending on what the property is used for), it is still necessary to file a return and claim this relief.
Details of the levels of ATED charges
The amount of the annual ATED charge depends on the value of the property involved. For the 2019/20 year, the charges due are as follows:
|Property value||Annual charge|
|More than £500,000 up to £1 million||£3,650|
|More than £1 million up to £2 million||£7,400|
|More than £2 million up to £5 million||£24,800|
|More than £5 million up to £10 million||£57,900|
|More than £10 million up to £20 million||£116,100|
|More than £20 million||£232,350|
Where the ATED charge is due, this needs to be paid to HMRC by 30th April each year, the same day that the annual ATED return is due.
Statistics just released by HMRC for the 2017/18 year show that the total number of declarations submitted in respect of ATED fell to 7,020, down from 7,840 in 2016/17. Total receipts from ATED for 2017/18 amounted to £143million; 73% of this related to dwellings in the London boroughs of Westminster and Kensington & Chelsea. This was down from a total of £175million in the previous year, 2016/17.
The reliefs available from ATED
Various reliefs are available from the ATED charge. These include where the property is:
- let to a third party on a commercial basis and isn’t, at any time, occupied (or available for occupation) by anyone connected with the owner
- open to the public for at least 28 days a year as part of a trade
- being developed for resale by a property developer
- owned by a property trader as the stock of the business for the sole purpose of resale
- repossessed by a financial institution as a result of its business of lending money
- acquired under a regulated Home Reversion Plan
- being used by a trading business to provide living accommodation to certain qualifying employees (provided they are entitled to less than 10% of the trade profits, the single dwelling interest and the company holding the single dwelling interest)
- a farmhouse occupied by a farm worker or a former long-serving farm worker
- owned by a registered provider of social housing
If no return is filed then HMRC can charge penalties as set out below, even if relief is available.
The penalty regime in relation to ATED (Sch 55 and Sch 56 FA2009).
The regime which applies to ATED is that which applies to most taxes and is contained within Schedules 55 and 56 of Finance Act 2009. Broadly speaking, the penalties due for late returns are as follows:
- £100 penalty for a return filed after the deadline, i.e. at least 1 day late;
- £300 penalty once the return is 3 months late;
- Thereafter, HMRC can impose daily penalties of £10 per day for a maximum of 90 days;
- Once the return is 6 months late, a further £300 penalty can be imposed.
Therefore, it can be seen that where a number of returns are filed late (see the example later), penalties can mount up and can be significant. It is imperative that advisers check penalty notices issued by HMRC to check these are correct and also to check that HMRC are acting within the recognised guidelines. The recent case of Advantage Business Finance Ltd can also be of some assistance here (also discussed later).
It’s Not Just About April!
As well as the annual returns due in April each year, which are due to HMRC by the end of the first month of the financial year, a return will be required if a single dwelling interest is acquired by a corporate during the year, or similarly if an interest is disposed of.
Acquisition of Property
Where a property is acquired part way through a year for the purposes of ATED, the deadline for submitting a return is 30 days following completion of the transaction. If an ATED charge applies then this will be pro-rated for the remainder of the year that the charge applies for, i.e. from acquisition to the following 31 March. Thereafter an ATED return and payment (if applicable) will be due for the following year.
Procedures when a property is disposed of
When property is disposed of, the ATED charge will be payable up to the date of disposal. Therefore a revised return will need to be submitted if a property is disposed of, firstly to notify HMRC that future ATED returns will not be due for that property (unless a relief return has been submitted and that same relief continues to apply to other properties still owned) and particularly in order to claim back an ATED charge paid for the part of the year where it is no longer due.
There may be ATED-related capital gains tax due on a disposal which took place on or before 5th April 2019. The charge to ATED-related CGT will depend on how long the property has been owned and how long the property has been part of the ATED regime. An ATED-related CGT return will need to be completed and this is usually due to be filed and tax paid by 31st January following the end of the year in which the disposal takes place, i.e. by 31st January 2020 for disposals in 2018/19. From 6th April 2019, ATED-related CGT will no longer apply and gains will be subject to mainstream corporation tax instead and so will need to be reported on the corporation tax return of the company concerned.
Furthermore, if the company is non-resident then a non-resident capital gains tax (NRCGT) return will also be due for disposals up to 5th April 2019. This usually needs to be completed within 30 days of completion of the transaction or a late filing penalty will be due.
From 6th April 2019, non-resident companies which dispose of any UK property (not just residential) will be subject to corporation tax rather than NRCGT (and/or ATED-related CGT) and therefore if they are currently subject to income tax will need to register again with HMRC in order to file the return under corporation tax rules.
Therefore, given all of the above it is worth bearing in mind that one disposal can mean more than one return and differing deadlines for each, and differing reporting requirements depending on which year and which regime the disposal will fall in! Given that it is not unheard of for advisers to come across or be contacted to assist with historic transactions which have previously been misreported (or not reported at all), particularly when dealing with international clients who may not necessarily be aware of all their UK reporting obligations, the next few years may prove to be quite interesting in this area. And no doubt this may lead to some advisers questioning their own sanity!
A key point to take away is that keeping up to date with clients and their affairs in the present time, rather than looking back at the year end, is becoming increasingly imperative given some of the tight deadlines mentioned and this is only set to become more important in the years ahead across all taxes as the UK tax system goes digital.
Corporates and the Non-Resident Landlord Regime
Under current proposals, all corporate non-resident landlords will be expected to report their income under corporation tax rules from April 2020 onwards, rather than under the income tax regime as they do currently on form SA700, meaning that the final income tax return period will run to 5th April 2020. From 6th April 2020, the new corporation tax rules will apply.
It is not clear yet whether iXBRL tagged accounts will need to be filed with these CT returns, but there does not appear to be anything to allay fears yet that this will not be the case, meaning a potential hike in compliance costs for this type of company in the form of increased professional fees, as most professional firms are likely to incur higher costs to deal with the additional compliance work as a result. There are also likely to be a number of other transitional issues to consider such as a company year end not coinciding with the tax year and how the payments on account made towards 2020/21 for income tax purposes will be taken into account. As seems to happen all too often, there a number of questions here but no definite answers, which makes planning for the future at this time more difficult for this type of client.
There have been a few cases heard by the tax tribunal in relation to ATED and late filing penalties. In two of these (‘Monaco’ and ‘Lucas’) the taxpayers’ appeals against the late filing penalties were dismissed on the basis that their ignorance of the law is not a reasonable excuse for the late submission of the return. In the case of ‘Chartridge’, penalty notices that were deemed to contain incorrect dates for daily penalties were challenged by the taxpayer and their representative and these were upheld in part by the tribunal.
In the case of Advantage Business Finance Ltd, decided by the tribunal in October 2018, the daily penalties of £900 for a late ATED return were cancelled by the tribunal as it was conferred by the tribunal that HMRC had not met the requirement of giving the taxpayer notice that daily penalties would accrue and therefore these were not enforceable. The initial £100 late filing penalty had only been issued once the return had been filed as prior to this, HMRC were not aware that a return was required by the company.
The cases above show that taxpayers have been unsuccessful in appealing against ATED late filing penalties on the basis of ignorance of the law. But there is some hope in respect of daily penalties if HMRC should seek to charge these.
A case recently crossed my desk where we had been asked to deal with the compliance work for a client we had previously given advice to. Originally both we and the client thought this would be dealing with the filing of the company non-resident landlord income tax return (SA700).
During the process of completing this work, the client was asked to confirm that the ATED return had been completed for the year by them or their previous adviser, at which point the response came back that the client had ‘never heard’ of ATED and I was left with that sinking feeling! As a result we had to have the slightly difficult conversation outlining the possible penalty implications and then, with the client’s agreement, deal with the catch-up exercise of ATED relief returns going back to 2016/17. HMRC did not seek to charge daily penalties but if they did, I would refer them to the Advantage Business Finance case. I am pleased to report that matters were resolved and the client’s 2019/20 ATED return has already been filed, on time!
Where clients hold property within corporate structures, it is imperative that accountants and advisers keep up to date with what their client is doing, or their future plans, and ensure that all acquisitions and disposals are reported to HMRC in a timely manner. If cases of historic transactions are encountered then it may be possible to argue for penalties to be reduced by HMRC, though appealing purely on the basis of ignorance of the law, either by the client or by a previous adviser, will not generally be accepted by HMRC as a reasonable excuse.
Paul Duce is a Chartered Tax Adviser with Gander Tax Services Ltd, a firm of tax advisers offering bespoke tax planning services and advice based in Petersfield, Hampshire. He can be contacted on 01730 231054 or at firstname.lastname@example.org