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Small print trap in residential property developer tax.
The introduction of the residential property developer tax (RPDT) announced in February 2021, was intended to target only the largest property developers in the UK. It would only apply to companies (or groups) with annual profits exceeding £25m. This message is reiterated in HMRC’s manual at RPTD01100.
The limited online commentary I’ve found echoes that only the biggest players in the industry will be caught. ‘Smaller-scale’ developers, with profits below £25m, could be forgiven for dismissing RPDT’s relevance [to them] out of hand, without checking the detail. This could prove costly.
Reading the legislation, it appears that, where a company undertaking residential property development, is a member of a group, unless that group has nominated a member to act as an allocating company, the aforementioned developer could find itself with very little allowance available to shelter its in-scope profits, resulting in a potentially significant additional tax charge. This is by virtue of FA 2022, s 43(5), which provides that where a group has not nominated an allocating member for a given period, the amount of the group’s £25m allowance available to each in-scope group member, will be an amount equal to £25m as divided by the total number of companies (within the charge to CT) that are members of the group at the end of the period, including those that are not carrying out development activities.
To illustrate the effect, consider a moderately-sized UK group comprising 30 companies, only one of which is within the scope of RPDT with RPT profits of £15m. If the group nominates an appointing company, it can allocate the entire £25m group allowance to the in-scope company, such that its entire profits would be covered by the allowance and no tax charge will arise. If, however, the group is unaware of this requirement and fails to nominate an appointing company, the allowance for the in-scope RPD company will only be £833,333, leaving profits of £14,166,667 exposed, triggering a RPD tax charge of £566,667. That’s an extremely high price to pay for what is an administrative failing.
Hopefully, I’ve missed something and someone will point out where I’ve gone wrong, but if I am right, why hasn’t more been made of this in the tax press?
Query 20,399 – Lulu.
Will losses prevent relief claim?
Since the late 1970s my client has farmed land (rearing and selling sheep). They registered for VAT and maintained a business bank account. The farming was initially lucrative but, with time, they would only manage a profit every five years or so. The profits and losses have always been reported to HMRC.
In 2018, my client was diagnosed with a serious illness and they sold all the farming equipment and their trading stock. Since 2018 they have let the land for the grazing of horses. The client remains responsible for the upkeep of the land, maintenance of the fencing and day to day husbandry. The profit from grazing has continued to be reported as income from farming and a white space disclosure made on the self-assessment tax return along the lines that the grazing is a continuation of the farming activity, in line with BIM55065.
The grazing agreements were always only verbal. The client has now sold the farmland along with the farmhouse and outbuildings.
Will the lack of formal grazing agreements and the fact that my client incurred consecutive losses in the last seven years, prior to the grazing, prejudice a claim for business asset disposal relief on the sale of the land?
Query 20,400 – Scared Crow.
Best tax result for room rental.
My niece lets out part of her flat and enjoys rent-a-room relief. The rent is more, and the bills are less, than £7,500 a year, so the relief operates by deducting £7,500 from the gross receipts and paying tax only on the excess.
Any contribution above the rent that the lodger makes towards bills is just treated as additional rent – an example at PIM4030 shows this. But what if the lodger pays rent to her, and they share the bills 50:50? If she could still deduct £7,500 from the rent and ignore the bills, that would appear to give a better result. I cannot find anything in the rules or guidance that explicitly deals with this. If it does ‘work’, would it be necessary to set up a separate bank account to deal with bills, to avoid my niece handling the money and so ‘receiving a contribution’?
Query 20,401 – Uncle Mike.
Is hairdresser using the wrong category?
One of my clients trades as a sole trader hairdresser and owns the freehold of her salon. She is VAT registered and uses the flat rate scheme.
Two years ago, my client stopped doing hairdressing work and her income from the salon now is only earned by renting out chairs to two self-employed stylists. The stylists pay her 25% of their earnings and keep all of their own sales. However, does this activity change mean she no longer qualifies for the hairdresser/beauty services category with the flat rate scheme? Perhaps she should use the rate for ‘real estate’ instead as she is earning income from land, or perhaps the ‘any other activity’ category? She buys enough towels and other items to avoid being a ‘limited cost trader’.
Separately, if a change of category is appropriate, should it be done from the current VAT period – as we are reviewing the situation now – or has she made an error in the last two years?
Query 20,402– Vidal.
Queries and replies
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