A number of shortcomings in the online reporting for capital gains tax within the 30-day window have emerged, causing cash flow issues for buy-to-let sellers, warns RSM
The main issues have arisen when buy-to-let investors or owners of multiple properties sell properties in consecutive tax years, which appears to create havoc with HMRC’s system and increase the administrative burden for taxpayers.
Elaine Shiels, partner, private client services, RSM said: ‘At the risk of stating the obvious, buy-to-let investors who are reducing their portfolio and owners of other properties which will give rise to a taxable gain on sale, may make taxable disposals in consecutive tax years. Obvious perhaps, but unfortunately HMRC’s systems cannot cope with that.
‘If the taxpayer reported a 2020/21 taxable gain online, reporting a 2021/22 taxable gain will almost certainly generate an incorrect calculation. HMRC describes this as a temporary problem and advises that vendors ask for a paper return to resolve the issue.
‘HMRC has not published a timetable to resolve the problem. We are concerned that, as the tax department is known to already have a processing backlog and is now asking for further paper tax returns to be filed, a comprehensive solution to the problem may be a long way off.’
In addition to this, RSM said there is a second problem, which ‘is more worrying’.
For example, consider a couple who sold a property in May 2020. At the time, they were unaware of their income levels for 2019/20. They took a prudent view of their capital gains tax (CGT) computations, paying tax at the higher rate of 28%. They completed their returns within 30 days, each making payment of their share of the taxes due to avoid a penalty. In the event, it turned out that the taxpayers had been too cautious and had overpaid CGT. However, once their income figures were finalised, they had to pay more income tax and national insurance.
HMRC is committed to the government’s agenda of digital by default. Self-assessment taxpayers will therefore know how payments of income tax, national insurance and CGT automatically filter into their tax accounts. Payments and liabilities will be set off against each other, and tax repayments generated where appropriate. So, in this hypothetical example, what happened to the overpaid CGT?
Shiels explained: ‘It is now emerging that, in these circumstances, HMRC is insisting that the additional income tax and national insurance liabilities must be paid in full. The overpayment of CGT can only be reclaimed by submitting an amended CGT return online. This feels unjust. If HMRC recognises the CGT overpayment, why will they not allow it to be set against other liabilities? Why should HMRC be entitled to charge interest and penalties on the income tax outstanding when overpaid capital gains tax has not been repaid?
‘The way in which HMRC’s CGT system has been designed means that – far from being digital by default – second and subsequent disposals require manual returns. What’s more, taxpayers find themselves having to overpay tax unnecessarily and then struggling to secure repayments from HMRC. This testifies to the inadequate design of the CGT system and augers very badly for the next round of making tax digital.’
Major changes to Making Tax Digital (MTD) are slated for 2023, albeit delayed for a few years by the pandemic.
For accounting periods starting after 6 April 2023, self-employed businesses and landlords with annual business or property turnover above £10,000 will have to submit quarterly MTD information to HMRC but still have to make a final declaration or self-assessment tax return after the year end. ‘With less than two years before the new MTD system comes into force, HMRC’s problems with its new CGT system do not inspire confidence,’ Shiels added.