If you miss the Self Assessment filing deadline from this year (i.e. 2010-11 tax returns onwards) you will be immediately liable for late filing penalties. The penalty will apply even if there is no liability or if any tax due is paid in full by 31 January 2012 which wasn’t the case in previous years.

These new penalties will apply to all Self Assessment tax returns from 2010-11 onwards.

The filing deadlines themselves remain unchanged at:

• paper return filing deadline is 31 October 2011.

• online returns filing deadline is 31 January 2012.

The new penalty regime applies to:

• paper returns received on or after 1 November 2011.

• online returns received on or after 1 February 2012.

The penalties for paper returns apply 3 months earlier than online filers. 

All the more reason to file your tax return online!  Here at Lions Accountants we file client tax returns online as standard.

Example:  A tax return filed six months late could attract a penalty of at least £1,300 as follows:

Mrs A’s tax return is due on 31 January 2012 but HMRC don’t receive it until 5 August 2012.

It is over six months late so she will have to pay all of the following:

• £100 fixed penalty
• £900 penalty – this is £10 each day from 1 May to 29 July, when the maximum 90 day penalty is reached.
• £300 or 5 per cent of the tax due – whichever is the higher

And, remember this applies even if there is no tax due which is a major change from previous tax years.

Have you a reasonable excuse for missing the deadline?

You won’t have to pay a penalty if you have a reasonable excuse for missing the deadline. For example, there may have been an exceptional or unexpected event, beyond your control, that meant you couldn’t send your return on time. In this case, you must send your return as soon as possible once the problem ends. There are no hard and fast rules and each case is considered individually but some examples of what HMRC may consider a reasonable excuse are:

• documents lost through theft, fire or flood that you can’t replace in time
• life-threatening illness, for example a heart attack that prevents you dealing with your tax affairs
• death of a partner shortly before the deadline
• industrial action by Royal Mail over a lengthy period of time
• issues with the online service, with no work-round – you’ll need to provide the error message you received

Furnished Holiday Lets (FHLs) and Capital Allowances (CAs) Claims on the Integral Plant and Machinery:

As covered in another of our blog posts, FHLs (whether situated in the UK or EU such as Spain, Portugal, France etc) are treated as trades for some tax purposes and therefore have some tax advantages over other property rentals/lettings.  The advantages under the special FHL rules include the entitlement to plant and machinery capital allowances on ‘qualifying assets’. Qualifying assets don’t just include furniture such as table and chairs though!

FHL owners (and unfortunately their Accountants!) often don’t realise that it is possible to claim capital allowances on the plant & equipment contained within (i.e. integral to) the property.  The property purchase price for tax purposes is actually made up of a) the land on which the property is situated b) the building (i.e. bricks and mortar) and c) the plant and machinery used within the building such as heating, plumbing, electrics, solar panels, cooker, baths, toilets etc. This latter element can often amount to between 10% to 35% of the cost of the property and capital allowances of up to 100% can be claimed on the element apportioned towards plant and machinery potentially resulting in a substantial income tax refund or reduced tax payment (although after the 2010/11 tax year a FHL loss cannot be set-off against other UK income but at least can be used to reduce future FHL profits).

Lions Accountants have dealt with capital allowances claims on Furnished Holiday Lets for clients by engaging a cost-effective surveyor to prepare a property report which is used as part of the detailed claim and calculations attached to the client’s tax return. After an insubstantial initial fee to cover the surveying cost, our competitive fee is payable only on successful processing of the tax claim thus making it easy for clients to receive the tax deduction they are due (by paying our fee only when they receive their tax refund/reduction).

FHL owners should consider their capital allowances position soon. HMRC have announced consultation in 2011 to implement a new specified period after the property purchase within which the capital allowances claim has to be made. Currently there is no time limit to start making your capital allowances claim – for example, we recently helped a client make a capital allowances claim starting from 2009/10 for a commercial property bought in 1999, over 10 years previously. That may change so that even if you would have been able to claim a tax deduction for capital allowances soon after purchase you may soon be time-barred in doing so (assuming the consultation results in new legislation). Why not ask Lions Accountants to review your situation now on a no-cost basis to ensure you’re not missing out on a valuable tax relief?

HMRC published Helpsheet 253 in August 2011 on Furnished Holiday Lettings (FHLs). This follows the change in tax rules in this area from the 2011/12 tax year (the year ending 5 April 2012). Set out below is a summary of the helpsheet combined with our additional comments.

Furnished Holiday Lets (FHLs):

FHLs are treated as trades for some tax purposes and therefore have some tax advantages over other property rentals/lettings.  The advantages under the special FHL rules are:

• Entitlement to plant and machinery capital allowances on qualifying assets (e.g. furniture, furnishings etc) – note: it is possible to claim capital allowances on plant & equipment contained within the property (i.e. integral to the property) such as heating, plumbing, electrics, toilets etc which can often amount to between 10% to 35% of the cost of the property;

• Capital Gains Tax (CGT) reliefs for traders – business asset rollover relief, entrepreneurs’ relief, relief for gifts of business assets and relief for loans to traders.

• Profits count as earnings for pension purposes

Note – up to the end of the 2010/11 tax year, it is also possible to offset a loss from a FHL against other income (such as salary, investment income) and thus obtain an income tax refund and also potentially increase a tax credit claim. This could not be done for an ordinary (i.e. non-FHL) property rental activity. A person’s 2010/11 Tax Return can be amended right up to 31 January 2013 so there is still plent of time to generate an income tax refund if you have a FHL loss for 2010/11 (maybe due to capital allowances).

You need to work out the profit or loss from these furnished holiday lettings separately from any other rental business to ensure that the special advantages are restricted to the furnished holiday lettings that meet the qualifying tests. FHLs are treated as trades to give them access to some trade tax advantages.  However they are not actually trades.  Normal rental business calculation rules therefore apply. Since the profit is taxable as rental income Class 4 NICs is not payable. The basis of assessment is the tax year ended 5 April, as for all property income.

To qualify as a furnished holiday letting the accommodation must be in the UK or European Economic Area (EEA) and commercially let.  There does not have to be a formal lease.  The EEA comprises the 27 states in the EU plus Iceland, Liechtenstein and Norway.  Letting outside the EEA does not qualify.

‘Commercial’ means let on a commercial basis and with a view to making a profit.  Close season lettings may produce no profit but normally help towards the cost of maintaining the property.  This letting can still be treated as commercial.  On the other hand, lettings to friends or relatives at zero or nominal rents are not commercial. Accommodation is ‘furnished’ if the visitor is entitled to the use of furniture.  There should be sufficient furniture provided for normal occupation.

All the FHLs properties you let on your own are treated as one business.  If you own a property jointly (either with a spouse or civil partner or with someone else) rather than in partnership then your agreed share of profits from that property will form part of your FHL business if you own more than one property. If you are in partnership all the properties you let in the same partnership are treated as one business.  You can’t amalgamate the properties you own individually with any you own in partnership. From 2009–10, properties in EEA (European Economic Area) countries other than the UK (e.g. Spain, Portugal, and France) have qualified as FHLs.  All the properties you own in the UK are taxed as one FHL business and all the properties you own in other EEA states are taxed as a separate business.  So if you have a FHL in the UK, one in Spain and one in Portugal then you amalgamate the two FHL properties in Spain and Portugal and keep those results separate from the results of the UK FHL.

After you have decided that your accommodation meets the above criteria you will need to see if the property then passes the following qualifying tests. The qualifying tests are more onerous from the 2012/13 tax year.

All three of the following tests must be satisfied if a letting is to qualify.

1. The availability condition (availability test/threshold) – during the period (normally the tax year), the accommodation is available for commercial letting as holiday accommodation to the public for at least 140 days (210 days for 2012–13 onwards).

2. The letting condition (occupancy test/threshold) – during the period the accommodation is commercially let as holiday accommodation to the public for at least 70 days i.e. 10 weeks (this rises to 105 days, i.e. 15 weeks,  for 2012–13 onwards).

3. The pattern of occupation condition – the accommodation must not be let for periods of longer-term occupation for more than 155 days during the year.

There is a period of grace election that can be made if you have not reached the 70 day occupancy threshold in 2011–12 or 105 day occupancy threshold from 2012/13 onwards.

Period to which the tests are to be applied

The period you need to apply the tests to is as follows:

• for a continuing let, apply the tests to the tax year itself

• for a new let, if the let was not a FHL in the previous year, apply the tests to the first 12
months from when letting began

• when the property stops being let as a FHL, apply the tests to the 12 months ending on the date letting finished.

Occupancy threshold

There are two elections you can make to help you reach the occupancy threshold.  If you have more than one property the ‘averaging’ election might be helpful and if you have a property that reaches the occupancy threshold in some years but not in others you could use a ‘period of grace’ election to help you to reach the threshold.

Averaging

Where someone has a number of properties/units of accommodation that are let as FHLs:

• each of them must separately reach the availability threshold and the pattern of occupation condition, but

• if some are individually let for less than 70 days (105 days for 2012–13 onwards), you can elect to apply the letting condition to the average rate of occupancy of the properties/units.

•You can only average across the properties in a single business – you can’t mix UK and EEA properties.

The time limit for making a claim is one year from 31 January following the end of the tax year.

Period of grace

In addition to the option to use averaging to help meet the occupation threshold there is also the possibility of making an election for a ‘period of grace’.

A period of grace election allows you to treat a year as a qualifying FHL year where you genuinely intended to meet the occupancy threshold but were unable to meet it.  In the year before the first year you want to be treated as a qualifying FHL year, the property must have reached the occupancy threshold, either on its own or because of an averaging election.  If, in the following year the property still doesn’t meet the occupancy threshold then, providing an election has been made for the earlier year, that year can also be treated as a qualifying FHL year. If the property still doesn’t meet the required letting level in the fourth year (after two years being treated as qualifying) then that property is no longer a FHL property.

The property must meet the availability threshold (and the pattern of occupation test).  You must be able to show that there was a genuine intention to let the property in the year for which a period of grace election is made.  For example, where you have marketed a property to the same or a greater level than in successful years this might be used as evidence of a genuine intention to let. If the lettings are cancelled due to unforeseen circumstances, for example, because of extreme adverse weather conditions or an outbreak of foot and mouth disease, then it is likely that you would be able to say that there had been a genuine intention to let.

The first year that you can make an election for is 2011–12.  You must therefore have met the old 70 day occupancy threshold in 2010–11 and have failed to meet that threshold in 2011–12 (the new 105 day threshold doesn’t come in until 2012–13).

Longer term occupation is a letting of more than 31 days.  You can let the property out for periods longer than 31 days in one stretch but none of the days will count towards your qualification.  However, if the total of all or any ‘longer term occupation’ lettings is more than 155 days in the period/tax year, your property will no longer qualify as a FHL for that period. You can let to the same person more than once as long as each let is less than 31 days.  All of these lettings together can total more than 31 days and still count as FHLs. Where there are exceptional and unforeseen circumstances, a letting might exceed 31 days and yet still count towards the occupancy test.  These could include a holidaymaker who falls ill or has an accident, and so cannot leave the accommodation on time.  There might also be exceptional instances where holiday visitors unexpectedly require a longer vacation, for example, delayed flights.

What to do with losses

If you make a loss in your FHL business, calculated following the rules in the notes to the UK property pages, you can set it against FHL profits of a later year.  From 2011/12, a loss in a UK FHL business can only be carried forward against a profit of the same UK FHL business.  Likewise from 2011/12 a loss in an EEA FHL business can only be carried forward against the profits of the same EEA FHL business.  Previously for 2009/10 and 2010/11 a loss from an EEA FHL (e.g. in Spain, Portugal etc) could be set off against your other UK income. From 2011/12, you can’t set the losses of one FHL business against the profits of the other if you have a UK and an EEA business.

Losses made on an individual FHL property may be set against the profits of other FHL profits in the same FHL business.  However, from 2011/12, losses of an FHL business can’t be set against the profits of a non FHL rental business.

The above is for general guidance only and specific advice should be taken on your own situation before any action is taken.