The embarrassment goes on for HMRC and the late filing penalties continue for taxpayers.
Timing is crucial for property returns and self assessment
by Helen Thornley
HMRC has confirmed that taxpayers who have omitted to file a property return under the so-called 60-day reporting rules must still file any missing returns now, even if they have gone on to report the disposal on their self assessment return.
22nd Jul 2022
Since April 2020, UK residents disposing of UK residential property on which capital gains tax (CGT) is due have been required to calculate, report and pay the tax within 60 days (originally 30 days) of the completion of the transaction. The default reporting route is online via the CGT on UK Property service and taxpayers who are within self assessment must effectively report twice, completing a property return first and then finalising their CGT position for the year via their self assessment return.
These rules involved a major change in the nature and timing of CGT obligations and we received a number of queries from agents during 2020/21 filing season about what they should do if the disposal had been included in a taxpayer’s 2020/21 self assessment return but the property return had been missed. Similar queries were flagged here in Any Answers. Since HMRC’s online system blocks the submission of a property return online if a self assessment return has already been filed, agents were unsure what action to take, and we sought answers from HMRC.
In general, the submission of a self assessment return including the property disposal does not satisfy or remove the in-year reporting requirements. There is only one situation where submission of a self assessment return containing all the necessary details of the disposal can eliminate the need for a property return, but this rarely occurs.
It only applies when the timing of the disposal and the interaction of the tax year end is such that it is possible to submit a self assessment return containing all the details of the property disposal prior to the 60-day deadline that would otherwise apply for the property return. For example, an unconditional exchange of contracts in February 2022 with completion in late March 2022 followed by a hasty tax return before the 60 days elapse by the end of May would work. In all other cases, the property return should be submitted before the self assessment return – something HMRC formally only confirmed in April 2022.
That confirmation came too late for those who, for whatever reason, had not got things in the right order for 2020/21 and were blocked from putting things right online. On 20 July 2022, HMRC shared the following advice with us and the other professional bodies: “In the situation when a taxpayer has already made an SA return and not completed a UK property return then they should complete a paper return. They should follow the normal process for doing this and contact HMRC.”
The “contact HMRC” is a reference to the need to ring HMRC to obtain the necessary paper form PPDCGT. At the same meeting, HMRC confirmed that taxpayers/agents should note on the PPDCGT return that the disposal has already been reported and the CGT paid via self assessment.
Using a paper return to correct the position in this manner is intended to be a short-term fix to this problem. HMRC are considering the longer-term approach, although they indicated that the cost of amending the system to allow online filing of a property return after submission of the self assessment return might be prohibitive.
Of course, the next question is what will be the consequences of making a late return in these circumstances will be. If the disposal originally arose in 2020/21, then any omitted property return could now be over two years overdue – leading to the unpleasant prospect of a penalty comprising the initial £100 late filing penalty, daily penalties, the higher of 5% of the tax or £300 for being over six months late, and a further similar charge for being over 12 months late.
We are waiting to hear from HMRC about their proposed approach to penalties. Given that we have been asking for some months what taxpayers in this position should do – during which time taxpayers have been unable to act, even if they have wanted to correct the position – we think that HMRC should give consideration as to whether it is appropriate to cap the penalties charged. For example, it might be appropriate to deem a late return to have been submitted on 31 January 2022 or the actual date of the relevant self assessment return, or allow a period of grace for people to regularise their affairs with a lower penalty than would otherwise apply. Discussions are still ongoing on this point.
Whatever happens, those who have filed in the wrong order – as well as those who did the process in the correct order but filed the property return late – need to be treated fairly in the context of penalties. Taxpayers who filed in the right order but late will have been issued automatically with a penalty via the system. And a taxpayer in either group might have had a reasonable excuse for failing to file, which would allow them to appeal any penalties raised.
Another alternative would be simply to cancel and refund all the penalties arising in respect of the late property returns. This is highly unlikely to happen, as penalties for the six months from June 2020 to December 2020 (the only period we have data for) were reported to amount to £1.3m.
While no one is likely to be happy about the extra time and costs of the proposed paper-return approach, HMRC are stuck between a rock and a hard place, as the alternative would be to let off some people from reporting, which would give them an unfair advantage compared to all those who have incurred the time and cost complying and create disincentives for future compliance.
The whole scenario serves only to reinforce my previous grumbles about the difficulties of trying to make an annual tax into a transaction tax.