On Budget day, the government published the outcome of the 2024 call for evidence on enquiry and assessment powers, penalties and safeguards, including proposals to align powers and safeguards across direct and indirect taxes. This announced that there would be further consultation on three areas:

• Options for new approaches to tackle high volumes of low-value non-compliance.
• Behavioural penalties.
• How to improve access to alternative dispute resolution and statutory review to help resolve disputes before they reach tribunal.

The first of the three new consultations was also published on Budget day. It explains that in recent years, there has been a significant increase in taxpayers making inaccurate claims for relief or having inaccuracies in their tax returns. This is challenging for HMRC because many of its powers are designed to address inaccuracies through one-to-one engagement with individual taxpayers. These processes can be time consuming, may be disproportionate and are not well suited to addressing issues that affect many taxpayers at the same time.

The consultation sets out four proposals:

• Introducing requirements to submit additional information for other tax reliefs and allowances (a requirement to submit additional information with R&D claims has already been introduced).
• Reforming revenue correction notices (RCN): aligning the conditions for issuing RCNs, requiring taxpayers to provide evidence to support a rejection of an RCN and potentially requiring HMRC to explain why one is being issued.
• Introducing a partial enquiry power to allow an enquiry into a specific issue.
• Introducing a new power for HMRC to require taxpayers to self-correct returns and claims.

The ICAS response

It is disappointing that instead of putting forward proposals for broader reform of the framework for enquiry and assessment powers this consultation continues the trend of introducing piecemeal changes to address problems arising, without fixing the fundamental underlying issues. The focus is solely on non-compliance (particularly of individuals and small businesses), not on improvement, modernisation or simplification of the system which would benefit all taxpayers.

Comprehensive reform should remove, or considerably reduce, the need for constant additions and adjustments to deal with problems, many of which are caused by an out-of-date underlying legislative structure that is no longer fit for purpose.

Our response calls for the publication of a timetable for the development of (and consultation on) detailed proposals for broader reform of the enquiry and assessment regimes.

The remainder of our response discusses the detailed proposals, from the starting point that any measures taken should not delay wider reform and should, where possible, use existing processes and powers as the starting point.

On that basis we can see some positive aspects to the proposals for supplying additional information, changes to RCNs and partial enquiry notices, subject to important conditions being met and adequate safeguards being in place. Our response includes suggestions for making these proposals work effectively in practice, without imposing additional unnecessary burdens on agents and taxpayers.

We do not support the proposal for the introduction of a new regime requiring taxpayers to self-correct. This would add a new layer of complexity, would be difficult for unrepresented taxpayers to navigate and would increase costs for compliant taxpayers and their agents.

Read the full ICAS response

Chris Campbell CA, Head of Tax (Tax Practice and Owner Managed Business Taxes), on the latest developments in the abolition of the special FHL rules

As covered in the April 2024 Tax Insights, the previous government’s spring Budget announced plans to abolish the special tax rules for furnished holiday lettings (FHL) from April 2025.

Since that Budget, many of our members have raised concerns with us about the impact the changes will have on their practice and clients. This included the lack of clarity on several key points, particularly in respect of the application of the anti-forestalling rule for capital gains tax, which took effect from 6 March 2024.

In July, the new government published draft legislation giving more details of how the changes would work. Ahead of our response to the consultation on the changes, we hosted a webinar in August to provide an overview of the proposals and issues our members need to be aware of when advising their clients.

Confirmation of changes in the autumn Budget
The autumn Budget confirmed the new government’s intention to proceed with the changes in the draft legislation for the abolition of the special tax rules for FHLs, which will cease in April 2025. The wording in the Finance Bill is largely unchanged from the draft legislation published last July, so this left several practical aspects requiring clarification.

Following the feedback from ICAS and other stakeholders, the government published a policy paper on abolition of the furnished holiday lettings tax regime.

Our members asked for clarification on the VAT position. The government has now confirmed that there will be no change to Schedule 9 VATA 1994 in respect of the VAT treatment of holiday accommodation. For VAT purposes, holiday accommodation will continue to be standard rated regardless of whether the property previously qualified for FHL.

There was uncertainty over whether the abolition of FHL rules would in itself constitute a cessation of the business for the purpose of capital taxes. The government has now confirmed that references in legislation to the cessation of business mean an actual cessation of business activity. The policy paper highlights that this should not be confused with the date when bookings are no longer being taken, but rather when there are no longer any bookings or lettings and no intention to take any in future. Subject to the anti-forestalling rule, for a taxpayer to qualify for the enhanced capital gains tax (CGT) reliefs before the rules change in April 2025, the business has to cease before 1 April for corporation tax or 6 April for income tax and CGT purposes.

ICAS is disappointed to note that the government has not taken forward the suggestion to take account of those taxpayers who operate an FHL business as a full-time occupation for the purposes of “relevant earnings” for pension purposes, or the ability of a taxpayer to pay class 2 NICs when they run an FHL business but do not have any other sources of employment or self-employment income. We feel these are areas which need not necessarily have changed the government’s policy intention, and would probably have limited impact on tax revenues but will significantly impact the individuals affected.

Form 17 – a particular Scottish dimension
We feel that the particular practical aspects of the Scottish dimension of the application of Section 837 ITA 2007 have not been given full consideration. We intend to have further discussions with HMRC on this point. Any feedback from our members on the practical aspects would be welcome.

Email us at tax@icas.com with any feedback