Tax News
June 2009
An end to furnished holiday letting rules
If you own property and let it out on short lets to people taking holidays, are you carrying on a trade or investing in property? It was a question that came up frequently before the ‘furnished holiday letting’ (FHL) rules were introduced in the 1970s.
Over time, the effect of these special rules made holiday letting quite attractive, and thus helped to boost British tourism. The owners of such properties can set losses against other income in the same way as trading losses. And because FHL properties are treated as trading rather than investment properties they attract entrepreneurs’ relief, holdover relief and other business capital gains tax (CGT) reliefs. FHL profits count as pensionable income. Owners can also claim capital allowances on equipment and furniture, which is not possible in respect of investment properties.
In the last Budget, however, it was briefly announced that the rules were to be withdrawn. Why? Because the restriction of this beneficial treatment to properties in the UK rather than the European Economic Area is likely to be contrary to European law. A fuller statement has now been prepared by HMRC and owners of furnished holiday lettings are recommended to take professional advice.
Pension change fallout
From April 2011, there will be a 20% cap on tax relief for pension contributions. Before the new rules come in, the Labour government wishes to stop better off members of society from increasing their pension contributions. As a result, a number of preventative measures have been introduced that will particularly affect the self-employed and owners of small companies. The problem arises with the definition of ‘regular contributions’, which is the amount that contributors can continue to pay into their pension unaffected by the new tax charge. The legislation (Sch. 35 of the Finance Bill 2009) defines regular contributions as those paid at least quarterly. For those who have traditionally waited until the end of the tax year to assess their cash position and take advice about pension savings, often writing out a substantial cheque in the last weeks of March, the annual contributions that they have made are not regarded as ‘regular’ contributions, and thus are not protected under the new rules. Instead, they will in future be limited to a £20,000 contribution in each of 2009/10 and 2010/11 if they are not to be hit with an additional tax charge. The same rule will hold true for company directors who make an annual pension contribution based on the company’s profits.
Car scrappage scheme update
On 18th May, the car scrappage scheme announced in this year’s Budget went live. Owners of cars and light vans registered before 31st August 1999 who have owned the car for at least a year will be able to scrap the vehicle and accept a total of £2,000 towards the cost of a brand-new car or van ordered from a participating dealership. The vehicle scrapped must have a valid MOT when the new car is ordered and must have a registration address in the UK. Full details of the conditions of the scheme are on the Directgov website (www.direct.gov.uk). The scheme will run until March 2010, or until the allocated funds have been used up. The media has reported than many dealers have used this as an excuse to increase new car prices.
IR35 fails to raise extra money
Through a Freedom of Information (FOI) request the Professional Contractors Group (PCG), the association that represents freelancers and contractors in the UK, has acquired details of the total tax take from IR35. IR35 legislation was designed to deal with “disguised employees”, individuals who the government believed were taking advantage of a corporate structure when they should have been taxed as any other employee. It now transpires that between 2002 and 2008, IR35 directly raised only £9.2 million. This equates to an average of around only £1.5 million per tax year, a tiny sum in government-revenue terms. The initial regulatory impact assessment for IR35 in 1999 stated that HMRC expected the measure to generate £220 million per year in National Insurance contributions alone. The PCG claims that this statistic demonstrates that IR35 has not lived up to the Government’s expectations.
MPs claimed for personal tax advice on expenses
One of the biggest scandals uncovered by the Daily Telegraph when it started publishing details of MPs’ expenses was the fact that nine members of the Cabinet had been claiming for personal tax advice. Tax rules prevent most people from claiming the cost of employing an accountant to handle their self-assessment return. HMRC has launched an inquiry into whether MPs should have paid tax on ‘excessive’ expenses claims.
Cheeky Girls in trouble
The pop group The Cheeky Girls has been served with a bankruptcy order by HMRC because of unpaid tax of £60,000. Monica and Gabriela Irimia, the twins who make up the group, have been in trouble before over unpaid VAT. Meanwhile, the sisters are rumoured to be in talks with BBC executives over a potential appearance on the new series of Strictly Come Dancing, which could add substantially to their income.
