Wednesday, 2 September 2015

Landlords and the restriction for mortgage interest relief

In response to signing the petition to the Government concerning the decision to deny higher rate tax relief on mortgage interest paid by landlords, I and every other signatory have received the following email. I will let you read it and comment further down.

Government response

“Hi Jon Stow,

The Government has responded to the petition you signed – “Reverse the planned tax relief restriction on ‘individual’ landlords”.

Government responded:

The Government is committed to a fair tax system so is restricting relief on landlord property finance costs to the basic rate of tax, reducing the generosity for wealthier landlords.
The Government is committed to a fair tax system so is restricting tax relief landlords can claim on property finance costs to the basic rate of income tax.

Landlords are currently able to offset their mortgage interest and other finance costs against their property income, reducing their tax liability. This relief is not available for ordinary homebuyers and not available to those investing in other assets such as shares. Currently the landlords with the largest incomes benefit the most, receiving relief at their marginal tax rates of 40% or 45%.

By restricting finance cost relief available to the basic rate of income tax (20%) all finance costs incurred by individual landlords will be treated the same by the tax system. This recognises the benefits to the economy that investment in property can bring but ensures the landlords with the largest incomes will no longer benefit from higher rates of tax relief.

By unifying the treatment of finance costs for all individual landlords, the Government is reducing the distortion between property investment and investment in other assets, and reducing the advantage landlords may have in the property market over ordinary homebuyers.

Less than 1 in 5 (18%) of individual landlords are expected to pay more tax as a result of this measure. Taking account of the other measures from the Summer Budget, the Office of Budget Responsibility (OBR) have not adjusted their forecast for house prices. The OBR expect the impact on the housing market will be small. Furthermore, this change is being introduced gradually from April 2017 over 4 years. This will give landlords time to plan for and adjust to these changes.”

The reality

Not every landlord will be affected by the change, but a substantial number will be. It will be especially difficult for long-term landlords with multiple properties and with a higher gearing in terms of mortgages. As property inflation has progressed, many will have re-mortgaged in order to buy further properties. In many cases, such a model will not be viable, because there will be no profit left.

I can sense that some will say sarcastically that their heart bleeds for the poor landlord who no longer receives net income from their properties. Yet the landlords affected will be in a trap. How can they divest themselves of their portfolio in short order, and in this context, two, three or four years is not long? If they do sell up of course the Government will reap a reward in terms of large amounts of capital gains tax, but it is hard to see substantial benefit to the housing market in terms of more property available to first-time buyers. Purely in terms of numbers it is unfair and will put some landlords out of business.

Of course if the property portfolio is held through a company, mortgage interest relief will not be restricted. Yet comparatively few portfolios are overall, especially with the higher mortgage gearing, and that is for commercial reasons. Mortgage lenders do not like lending to companies because they have less security. In the past I have dealt with a client who had property portfolios worth in excess of £3M with borrowing of nearly £2.5M. He would not be able to carry on.

You might have noted that I mentioned putting landlords “out of business”. The response from HM Government talks about property investment, but HMRC does see rental activities as a business in some contexts. In a business, one expects to deduct in full all one's revenue costs. Is there a slippery slope which will bring more commercial activities to lose full relief for finance costs?

Property “investment” is not like holding a portfolio of shares or multiple ISAs or money on deposit. There is a risk as with stock market investments, but anyone who has been a landlord will tell you that there is a lot more involvement as a landlord, even if you use a letting agent. It can be very hands-on.

Suppose the tenant causes a fire or a flood and you have to deal with the insurance company, attend the site on multiple occasions to see the insurance assessor, get builders' estimates, supervise the builders, and get the letting up and running again. It can take many months, be pretty full-time, and very stressful. Believe me, I have been there, fire and flood. It definitely feels like running a business. The time commitment is often very substantial.

The Government and HMRC on their behalf are being disingenuous. It suits them to make a tax-grab from people whose effectively full-time work is from their letting business, and who are often providing a real service to local authorities in dealing with their displaced people requiring housing.

It would not be a “fair tax system” for those whose property businesses will be destroyed.

I believe the new rules will be a costly mistake; costly for the landlords, but also for those who need a roof over their heads but will never be able to afford to buy.

Monday, 10 August 2015

HMRC systems not joined up

Three months ago I registered a new client for Self Assessment as she had purchased a buy-to-let property which gave rise to a decent profit in 2014-15.

Two days ago she and I received a Form P800 reconciling her PAYE income and giving rise to a refund of over £800. This was on the same day my client had emailed her spreadsheet of lettings income and expenses.

I telephoned HMRC to suggest they did not send the tax refund as ultimately it would not be due to my client. I was told that it was already in the post, and as it turned out my client had the cheque today. We have agreed she will bank it and pay back the money under Self Assessment. We cannot trust HMRC not to lose the cheque if we sent it back, and anyway it would be months before they dealt with it.

I did ask the HMRC agent why they would make a refund on PAYE when they had been advised the client had another income source and had registered to do a Tax Return. Since the agent would not have the knowledge to be able to answer and because her command of English was poor, the question was effectively rhetorical.

The answer is probably that, as per usual, there is a lack of joined-up thinking going into HMRC systems and programming. Oh, it is all so frustrating.

Thursday, 2 July 2015

Professional firm targeted by fraudsters

Recently I heard a worrying tale from a partner in a firm of accountants, who shall of course remain anonymous.

Apparently fraudsters had hacked into their computer network and submitted entirely bogus personal Tax Returns on behalf of actual clients of the firm. All these false Returns resulted in substantial tax repayments which were directed to bank accounts controlled by the crooks.

HMRC had spotted the frauds, although I am not sure how much money was wrongly paid to the villains.

It is a lesson to all of us not to be complacent about Trojan horses and clicking on links in dodgy emails (which is apparently what let these guys in). If we are caught out it could be hugely damaging to our firms' reputations, and result in the loss of the clients whose privacy has been violated. Also, we would be patsies in allowing the tax to be stolen from the Treasury, which is the same as if it was taken from our collective selves.

Wednesday, 1 July 2015

Unintended consequences

One of my clients called me in a panic. She had received a "threatening notice" from HMRC saying that she would be fined £100 for not sending in her Tax Return. Actually, I submitted her return for 2014-15 on 11th May 2015.

Hers is always one of the first I do each year. Why? Because she is ninety-five years old and does not like anything hanging over her.

Obviously I was very puzzled about the threatening letter. It turns out this was her Notice to File a return. Normally one would expect these to be posted in April, but due to the HMRC contract with Royal Mail they are still trickling through; hence my client's was received on 1st July.

Not everyone can immediately understand that some letters from Officialdom are due to inefficiency and incompetence, and therefore some people take these letters seriously, especially vulnerable people.

Surely we can hope that next year all Notices to File are sent out in April and that taxpayers receiving them will not feel threatened? My ninety-five year-old was in a tail-spin and could scarcely catch her breath. Government contracts with Royal Mail should not cause such distress.

Monday, 22 September 2014

Working Tax Credit and working hours ploys

I am no expert on Working Tax Credit (WTC), and I know that many who were on Incapacity Benefit and even Disability Living Allowance have been pronounced “fit to work”, some say unfairly, in the last two or three years.
Word on the street is that you can get your sixteen or thirty hours work to be entitled to WTC by being self-employed selling through Kleeneze catalogues, or maybe selling lottery tickets for charities. How you can prove your working hours from that, I don’t know, but maybe neither HMRC nor DWP care.

Are my sources correct? Have you heard anything about this? Does it matter?

Monday, 8 September 2014

State Pensions, PAYE and unfairness

Not all the taxpayers I look after have high incomes. From time to time I help pensioners and others whose means are quite small.

It may surprise many, but there are some people whose only taxable income is from the UK State Pension. Quite often it is enhanced by the additional State Pension, previously known as the State Earnings Related Pension Scheme (SERPS) and the State Second Pension. This does not mean that those pensioners are living the high life. Their total income might well be no more than £11,000 or £12,000 a year, but that is more than the current Age Allowance of £10,500, frozen by the Chancellor, George Osborne. That means that those pensioners have a tax liability.

Quite a few new pensioners with higher State Pensions are unaware that they have a liability to tax. In fact many are unaware that State Pensions are taxable at all. In the past year or so, I have come across such individuals who have suddenly found themselves with unexpected tax demands and on one occasion a demand for four years’ tax all at once.

I took on the poor chap who had paid HMRC for four years’ tax, and found that actually he owed nothing because HMRC had overlooked his entitlement to the Married Couples Allowance. This actually eliminated his supposed liabilities, but he died before I got the tax back. His widow received the payment.

However, there are others who are receiving tax demands on their State (and only) Pensions out of the blue, and still do have a tax liability. Surely it would be less painful to bring taxable state benefits into PAYE and ensure that no one receives any unexpected shocks? After all, these are by definition people on low incomes, and it cannot be expected that they will have any savings out of which they pay tax. Generally they spend what they receive at that income level, and who can blame them?

Better still, why not exempt from tax any amounts of State Pension in excess of the Age Allowance or Personal Allowance as applicable. After all, these pensioners have done their bit.

What do you think?

Friday, 7 March 2014

Fair Tax and the real world

There has been a lot of talk about Fair Tax and self-appointed parties have even persuaded an august professional institute to buy into their plan. It sounds a bit like clothing manufacturers getting the Woolmark (remember that) for a fee of course. The Woolmark was a guarantee of Merino wool. A Fair Tax Mark would be no guarantee of anything.

The question is, what level of tax is fair? We are talking about corporation (company) tax of course. All the criticism, mainly aimed at multinational companies, is about the level of corporation tax they pay. Now it is true that they might have more flexibility than smaller businesses to arrange to pay a lower level of corporation tax in the UK by transferring profit to other jurisdictions. 

At the same time, there are rules on transfer pricing which apply to large companies and in which HMRC take a keen interest. All businesses need to reinvest, and to encourage this there are quite generous allowances against tax that can be claimed (because the Treasury wants them to) which means that taxable profit might be lower than accounting profit.

However, I do not want to get too technical. I will leave that to others. The government is reducing the main rate of corporation tax to 20% on taxable profit for all companies, large and small, from 1st April 2015. The previous administration was also intent on reducing the rate, and that is because Government perceives that with a low tax regime on profits, overseas businesses will want to invest more in the UK. It all makes sense to me.

My next point is one already made by Ben Saunders who has helpfully extracted from HMRC's accounts for 2012-13 the following figures which show that corporation tax is only the fourth largest revenue raiser anyway:
  1. Income tax – £150.9bn
  2. National Insurance – £101.7bn
  3. VAT – £101bn
  4. Corporation tax – £39.2bn
Do read Ben's piece, in which he points out that in the UK, most businesses are not companies anyway.

So the Government does not regard raising money through corporation tax as their biggest priority, and there is a reason for this quite apart from the question of competing for business against foreign competition. That reason is that corporation tax is not the only tax that companies pay.

Who actually pays all the income tax recovered under PAYE from company employees? It is the companies that employ them. Who pays the National Insurance? The employees think they pay their share, because it in on their payslips, but actually it comes out of company bank accounts.

Therefore it is ridiculous to have a measure of one tax to be regarded as “fair” and to ignore all the other tax revenue generated.

We can take this one step further. Large companies as well as small ones and other businesses contribute to raising the level of employment. In fact in the UK there are more people employed than there have ever been before. If people are employed they are drawing far less in benefits and therefore saving the Treasury even more money which they would have to cough up if those employees had no work and were sitting at home.

Do not talk to me about Fair Tax. The economy is very complicated, and the tax regime as a whole is a sort of steering mechanism. It is crude and sometimes not very responsive, but to extract one element is disingenuous, particularly where that element of potential low tax on profits is an important attraction for investment.
Enhanced by Zemanta