News

Property Update – Feb/Mar 2015

Welcome to Property Update, keeping you informed on topical developments and opportunities in the property sector.

Business Rates round up

Government seeks views on business rates avoidance

At the Autumn Statement 2013, the Government announced that it would discuss with business, options for the long term administrative reform of business rates after 2017.  In the last year, a Government-led business rates avoidance working group was established in order to gain a better understanding of the type and scale of business rates avoidance and whether that avoidance can be prevented.

So far, the working group has identified a range of avoidance methods which often take advantage of specific reliefs and exemptions. Avoidance of empty property rates through periods of artificial/contrived occupation is one example.  Other interested parties have suggested that avoidance occurs because properties do not appear on the ratings list or valuations do not reflect material changes.

As the next step in this process of information gathering, HM Treasury has issued a discussion paper seeking the views of the wider business community.  This paper (which is available here) sets out a variety of questions regarding the scale and methods of avoidance as well as possible options for tackling avoidance.  Interested parties, particularly those who currently rely on exemptions and reliefs, are encouraged to submit their views.

Submissions should be made via email by 28 February 2015.  Contact details are set out in the discussion paper.

 

Act fast to recover overpaid business rates

Along with the widely reported announcement made as part of the Chancellor’s speech, the Autumn Statement is accompanied by a detailed report setting out a wide range of measures.  In December, this report included the Government’s intention to reform how alterations to the rateable value of properties are backdated. 

Currently, if a business feels that the rateable value of their premises is too high, for example, because of changes to the property or its use, the business can appeal the current valuation.  If successful, the change can be backdated as far back as April 2010 when the current valuation list was introduced, resulting in potentially sizeable repayments.

However, the Government’s latest announcement will mean that appeals lodged on or after 1 April 2015 may only be backdated to 1 April 2015. In order to make a claim stretching back to April 2010, the business must lodge its appeal by 31 March 2015.  A failure to do so will mean any repayment for the period to 31 March 2015 will be lost.

Businesses who think they might be paying too much are advised to act fast and seek professional advice.  But this comes with a word of warning; an appeal can result in the rateable value going up as well as down and any increased liability will be also be backdated.  

 

Look out for revaluation forms

In order to calculate the correct amount of business rates due, the rateable value of each non-domestic property must be established and this is determined by the Valuation Office Agency (VOA). 

In order to reflect changes in the property market, the VOA periodically conducts a revaluation exercise.  In England, the last revaluation occurred in 2010 and the next is due in 2017.  Ahead of the next revaluation, the VOA is seeking up to date information about all affected properties and from January 2015, will be sending revaluation forms to ratepayers asking them for information on their property and business. 

Ratepayers are asked to complete these forms as accurately as possible and to return them to the VOA within 56 days to avoid a £100 late submission penalty.

 

Welcome changes to the operation of the Construction Industry Scheme (CIS)

Last summer, HMRC published a consultation document which proposed various changes to the operation of the CIS.  In December 2014, HMRC published the responses to this consultation setting out a timetable for the implementation of the revised proposals.

With effect from 6 April 2015:

  • The obligation to submit a CIS return in a month where no payments to sub-contractors have been made will be removed.  HMRC would prefer that nil returns were still submitted in order to prevent the issue of automatic penalty notices. However, assuming no payments were made to sub-contractors in the month, contractors will be able to appeal these notices.  If no payments are to be made for several months, you can let HMRC know and they will flag your CIS scheme so that late filing notices are not issued.
  • Joint ventures applying for gross payment status will no longer have to meet the compliance test conditions when applying for gross payment status if:
    • in the case of a partnership, one or more of the partners is already registered for gross payment status, as long as that person(s) has the right to a share of at least half of the assets or half of the income of that firm; or
    • in the case of a company, one or two of the members are already registered for gross payment status, as long as those members possess or are entitled to acquire at least 50% of the share capital or the voting rights.

What this means in practice is that HMRC will not take partners’ or directors’ personal tax compliance into account when a joint venture applies for gross payment status.

  • Repayments of sums deducted from payments to sub-contractor companies will be permitted during the tax year in which the deductions were taken, provided that the sub-contractor is a company which is subject to a winding up proceeding under the Insolvency Act 1986. The company must have ceased trading. If the company is also a contractor, it must also have ceased to make payments to sub-contractors.

With effect from 6 April 2016:

  • The turnover test for established business with multiple partners or directors will be reduced from £200,000 to £100,000, excluding materials costs.
  • CIS returns will have to be filed online.

With effect from 6 April 2017:

  • Verification of sub-contractors will have to be done online.

 

SDLT Update – Upper Tribunal rules on Project Blue

This case concerned the interaction of different provisions within the Stamp Duty Land Tax legislation and serves as a good example of the complexity of this legislation.

Project Blue Limited (PBL) acquired Chelsea Barracks from the Secretary of State for Defence (SSD).  This was completed simultaneously with a Sharia compliant property financing arrangement under which PBL sold the property to a Qatari Bank for £1.25bn and a lease back to PBL. The price of £1.25bn was calculated based on the purchase price payable to the SSD plus the SDLT payable and the costs of developing the property. Land transaction returns were made for each leg of the transaction as follows:

  • sub-sale relief was claimed on the acquisition from the SSD so that no SDLT was paid – a flaw in the legislation meant the usual disapplication of these rules for transactions connected with Sharia finance did not apply; and
  • alternative property finance relief was claimed in respect of the transactions with the bank.

HMRC subsequently raised an enquiry and amended the first return so that the chargeable consideration was £959m.  When PBL appealed this amendment, HMRC changed its case to apply the SDLT anti-avoidance legislation in s.75A and increase the chargeable consideration to £1.25bn.

In summary, S.75A is designed to prevent SDLT avoidance by introducing additional steps into a transaction as a result of which the SDLT payable is less than it would otherwise be on a straight forward transaction.  The chargeable consideration under s.75A is equivalent to the highest amount paid for any of the scheme transactions.  However, the consideration for any transaction which is incidental to the arrangements can be ignored.

The Upper Tier Tribunal ruled that, although the effect of the interaction of the sub-sale relief and alternative property finance provisions put forward by PBL was correct, S.75A must be applied regardless of motive.  Therefore, SDLT was payable by PBL on consideration of £959m.

What is particularly interesting about this case is:

  • Firstly, that it confirms that S.75A applies regardless of motive.  In other words, whether or not PBL structured the transaction in this way for avoidance purposes (i.e. to take advantage of a flaw in the drafting), the provisions of S.75A would apply regardless.  In this case, it results in a decision which, on the facts, makes some sense.  However, there could be other examples where the rules apply to distort the application of the SDLT rules to otherwise entirely commercial transactions.  HMRC guidance states that HMRC will not seek to apply this legislation unless there is an avoidance motive, but there are no guarantees. 
  • Secondly, despite the fact that the circumstances of this case were relatively straightforward, the members of the Tribunal had particular difficulty in their interpretation of the legislation, commenting that the drafting of S.75A “leaves a lot to be desired”.  The result is a particularly complex decision, with different members taking different approaches, which leaves the taxpayer with little or no definitive guidance.  No doubt we can expect to see further litigation on this subject.

If you would like to know more about this decision or you have any questions regarding Stamp Duty Land Tax (including the recent changes to the rates for residential property), please get in touch.

 

Compensation scheme for HS2 launched

As part of its package of compensation measures designed to compensate property owners affected by the construction and operation of HS2, the Government has recently announced the introduction of the Phase Two Exceptional Hardship Scheme (the EHS).  On the Government’s preferred route from Birmingham to Leeds, the line will travel through both Derbyshire and South Yorkshire.

The EHS is designed to provide a form of relief for those property owners who have an urgent need to sell their property, but cannot do so because of the property’s proximity to the proposed route for HS2.  This could be for a variety of reasons including their finances, health or care needs, their employment or their family circumstances.  It could also include the need to finalise the winding up of a deceased estate.  A successful claimant under the EHS will be able to sell their property to the Government at its unaffected market value.

In order to make a claim under the EHS:

  • The claimant must have an eligible interest in the affected property. This includes owner occupiers of residential property as well as agricultural units (which include a dwelling) and some commercial properties.  It does not include commercial or residential landlords.
  • The affected property must be on the proposed line or in such close proximity that it is likely to be adversely affected.
  • The claimant must have made all reasonable efforts to market and sell the affected property and must be able to prove that the saleability is being affected by HS2 (e.g. with feedback from viewings).  This will include the condition that the property has been marketed by multiple agents for at least 3 months and that no offers have been received within 15% of the unaffected asking price.
  • The claimant must not have been aware of the proposed route at the time of the purchase.
  • There must be an urgent need to sell the property in order to avoid exceptional hardship to the claimant.

The EHS is expected to be available until the end of 2016, at which point the Government expects to announce further statutory measures.  These further measures will enable other affected property owners, who do not meet the hardship criteria, to apply for the Government to purchase their property in advance of construction.

 

Property Alerts – helping to protect you against fraud

In 2014, HM Land Registry launched its Property Alert service with the aim of providing assistance to anyone wanting to help protect their property from the risk of fraud. 

Easier access to title information combined with the increasingly sophisticated counterfeiting techniques and the abolition of the Land Certificate in 2003 have seen an increase in a fraud known as “title theft”.  Title theft typically involves the fraudster impersonating the registered owner in order to sell or mortgage the property and abscond with the proceeds. 

Whilst the Land Registry offers a compensation service, this isn’t always available.  For example, legislation protects innocent third parties who have purchased a property or lent money to fraudsters in good faith.  In one recent high profile example, the fraudsters transferred the property to themselves without the owner’s knowledge and then mortgaged the property.  The land owner was able to get the title restored to him, but the mortgage could not be undone since the bank was an innocent third party who relied on the information in the Land Register.  This meant the bank could still exercise its power of sale over the property in order to recover the mortgage advance.

Information from HM Land Registry indicates that the properties most at risk are:

  • empty properties;
  • those which are the subject of (potential) family disputes;
  • tenanted properties – it is easier for a tenant with access to the property to pose as the registered owner; and
  • properties without a mortgage.

In order to help protect against fraud, the Property Alerts service is free and allows an individual to register for property alerts for up to 10 different titles.  Only an individual can register, but they do not need to own the property so, for example, an individual can register on behalf of vulnerable relatives, or a company secretary can register a company’s property.  An email alert will be received whenever an official search or application is made.  If the recipient has not actioned this request, swift action can help to prevent a fraudulent transaction taking place, for example, by contacting the applicant to alert them to the risk of fraud. 

Individuals who believe they are at immediate risk of property fraud should seek legal advice and contact the Land Registry’s property fraud line.

 

Deposit loan scheme

On 3 February 2015, the Housing Minister announced government-wide support for the deposit loan scheme, with Government departments agreeing to offer deposit loans to their staff. The scheme was created by Shelter and will allow employees, in both public and private sectors, to borrow some of their salary upfront and interest-free, in order to pay for a rental deposit. The sum is then repayable from employee salary payments over up to a year.

The Department for Communities and Local Government was the first to introduce this scheme, in October 2014, and is now working with the Department for Business Innovation and Skills to increase availability in the private sector.

As regards the tax position of such loans, since a total beneficial employee loan of up to £10,000 does not attract an income tax charge, it is unlikely that this will be a concern in more than a very small number of cases.