P11D interim penalty notice letters - HMRC update
Having identified the technical issue, HMRC have asked for evidence of actual instances where such companies are caught. We would like to hear from members of any examples in this area, and of any wider tax issues affecting such entities that should be drawn to HMRC‚ s attention.
Our letter is available to view below in PDF format.
"Thank you very much to you and your colleagues for taking the time to set out your concerns in relation to ATED and companies which own, say, the freehold interest in a block of flats. This type of company may also be the management company of that block of flats.
There are two concerns:
- The aggregation rule in s110(2) of Finance Act 2013 and whether individual leaseholders who are shareholders in the company that owns the freehold interest could be considered to be connected both to the company and to each other; and - that the value of the freehold interest held by the company in an individual flat could exceed the new £1m and £500,000 entry thresholds thereby bringing them into ATED, regardless of s110(2).
1. Aggregation Rule
In relation to point 1 above, the concern is that under s1122(4)(a) CTA 2010 any two or more persons acting together to secure or exercise control of a company are connected with each other. Therefore, the company is connected to any member of the company under s1122(3) because he, together with persons connected with him, control the company. Having consulted technical specialists in HMRC we think that although this might be possible in the case of these types of companies, it must be unusual. You cite the case of Steele v EVC International NV (69TC88) which looked at the phrase 'acting together'. In that case the two shareholders entered into a shareholders agreement which continued to be recognised and implemented by the parties. The shareholders agreement was a very long document making the most extensive provision of the joint venture between two shareholders. It was found on those particular facts that the two were acting together.
It seems unlikely that an ordinary memorandum and articles of association will constitute the shareholders "acting together". In fact, it would be unconscionable because it would follow that all shareholders in a company would be connected. The cases it would affect would be where there is a comprehensive shareholders agreement which would dictate how the company would be run.
We are happy to discuss any specific instances identified where you consider such companies fall squarely within s.110(2). I would also be interested to understand in more detail the exact nature of the companies in question, for example are they set up as a Residents' Management Company (RMC) or a Right to Manage Company (RTMCo) or are they something different?
2. The Broader issue
In relation to point 2 above, there is a wider question of whether such companies are caught within ATED either now, or when the entry threshold is reduced. By way of example you cite a 'hypothetical' company which has a long head lease and grants 10-15 year leases to the residents.
In order for the company to be caught within ATED, the freehold interest (or the head lease) would be the proportion of the value of the freehold interest in relation to each individual dwelling.
Before deciding whether there is a widespread problem, I'd like to understand whether this is merely a theoretical problem, and if not what the scale of the problem is. It is difficult to take a view unless we have evidence of actual instances where such companies are caught.
You also mention in your paper that these companies tend to give rise to other tax issues and it would be useful to understand a little more about what those issues are in case there is anything we can learn which might help inform the position."