1. BACKGROUND TO THE CLAUSE

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1 1. BACKGROUND TO THE CLAUSE 1.1. Clause 6 and Schedule 2 make provisions for a reporting requirement and payment on account regime where a capital gain is made on the disposal of a residential property by an individual, trustee or personal representative. (For simplicity we have referred only to individuals below). The changes will affect non-uk residents from 6 April 2019 and UK residents and non-uk residents with a branch or agency asset from 6 April Our comments are mainly focused on the impact of the new rules on UK resident individuals from 6 April These provisions have previously been the subject of consultation. In our response 1, the ATT raised concerns over: Ensuring that there is sufficient publicity of the new measure to relevant parties, particularly conveyancing solicitors the significance of this change should not be underestimated. The short timescales proposed in which individuals must calculate, report and make the payment on account of Capital Gains Tax (CGT). Ensuring that the mechanism for calculation was straightforward and that reasonable amendments can be made. A soft landing for penalties in the first year as individuals familiarise themselves with their new obligations. We also observed that, if the timing of payments of tax under self-assessment is of more general concern, we would prefer to see a wider debate on the issue, rather than the piecemeal introduction of legislation We have a number of observations on the proposed clauses below, together with suggested remedies where appropriate. For the purposes of differentiating between the existing self-assessment return reporting details of all income and gains after the tax year, and the new return required to report the disposal of a residential property during the tax year, we have referred to these as an SA-return and RP-return respectively. 2. GENERAL OBSERVATIONS AND SUGGESTIONS 2.1. Interaction of the SA-return and RP-return 2.2. We would appreciate clarity either in legislation or in guidance on the interaction between the SA-return and the RP-return While it is possible to amend an RP-return under the limited circumstances set out in paragraph 12, we presume that the intention is that in most cases the individual s SA-return will supersede the RP-return when it is submitted. The SA-return will contain the same or similar information about the property disposal as the RP- 1

2 return together with the necessary details of income and all other gains/losses in the period to complete the tax computation. (See 3.16 below for our comments on the contents of the RP-return). Otherwise it could be considered necessary to submit both an SA-return and an amended RP-return at the same time if, for example, a valuation has been amended since the initial submission of the RPreturn We note that paragraph 3 already sets out two occasions when the requirement for an RP-return is entirely removed and the SA-return is considered sufficient for both the in-year disposal and overall year-end reporting. These are if an SA-return containing the disposal is made within the time-limit for the RP-return, or the completion date is so much later than the exchange date, that the deadline for an SA-return has passed While in practice it may be preferable in some cases to make amendments to the RP-return under paragraph 12 before the SA-return is submitted, especially where an increase to the payment on account is required to prevent interest charges (although see our comments in 2.7 onwards), there may be cases where the additional administration costs exceed the interest charges, so that the person making the disposal, having made their initial RP-report, would prefer to simply submit any subsequent amendments via their a SA-return rather than to amend the RP-return Suggested remedy: The inclusion in paragraph 12 of a statement that the submission of an SA-return will take priority over the RP-return and be deemed to amend all previous RP-returns for the year The purpose of the payment on account 2.8. In the context of income tax, a payment on account is calculated for a given tax year by reference to the previous tax year. Such payments on account will only be sufficient for the year where an individual s income does not change from year to year, otherwise a balancing payment is likely to be required and the payments on account for the following year will be increased. The pattern of payments on account is therefore not intended to accurately account for the individual s income tax each year, but should at least ensure that a proportion of it is collected in advance of the tax return deadline of 31 January following the end of the tax year. Where insufficient tax is collected, the payments on account are increased next year to prevent the same underpayment occurring Interest is charged on payments on account which are paid late. Interest is charged, and penalties are also possible, where an individual has made an excessive claim to reduce the payments on account which was deliberate or careless In contrast, while the term payment on account is also used in respect of the payment due with the RP-return, even if the tax is paid within the 30-day window we understand from conversations with HMRC that interest will be charged if the amount paid based on the RP-return is found, presumably on submission of the SA-

3 return, to be understated. It appears therefore that a more complete and accurate payment is required than the payment on account for other self-assessment matters While we have no objection in principle to the charging of interest on any RP-return related payment on account which has been paid late, or the charging of interest where the RP-return has not been completed in good faith (so that the payment on account was carelessly or deliberately understated), we do have concerns about the concept of interest being charged on a tax bill which cannot be accurately established until the end of the tax year when all the facts that affect the computation (including the level of the individual s taxable income) are known. We also think that the use of the term payment on account is confusing, when it appears that the intention is to capture as near as possible the correct amount of tax much nearer the transaction date We understand from discussions with HMRC that the intention is to charge interest on the difference between the payment on account for the gain based the RPreturn and the gain attributable to the property disposal when the SA-return is submitted. Assuming that we have understood this intention correctly, this would mean: On submission of the SA-return, it will be necessary to establish the element of any CGT due which related to residential property disposal(s). Where a number of asset disposals and gains or losses have been reported this may be complex, and require the apportionment of the total CGT charge, or the recalculation of the CGT for the residential property elements by assuming all losses and reliefs were available but ignoring any non-residential disposals which realised a gain in the year. Either way, rules to confirm HMRC s preferred calculation mechanism will be needed. The CGT figure attributed to the residential disposal from the SA-return then needs to be compared to the payment(s) on account made under any associated RP-return(s) and interest charges calculated based on the underpayment for the period between the due date of the RP-return and the date that the CGT was ultimately settled in full. This could be complex and time-consuming in some situations and may require the use of estimates. (In some cases, such as where an overage figure is being included - for example if there is the potential for planning permission in the garden - the return itself may still contain an estimate of a necessary figure.) An interest charge would seem particularly harsh in the cases where an individual s payments on account for their income tax and national insurance contributions were sufficient to cover any increase in the CGT charge on residential property between the RP-return submission and the final SA-return Suggested remedy: We would suggest that it is accepted that the payment on account regime for residential property is intended to be just that a payment on

4 account of some or all of the liability which will be adjusted after the tax year. The interest and penalty regime for the payment on account for the RP-return could then be styled in a similar manner to the payment on account regime for the SAreturn, with interest for late payments, and interest/penalties where an individual has carelessly or deliberately under or over-stated any of the figures on the RPreturn. Consistency between the two approaches is likely to reduce taxpayer confusion. 3. DETAILED OBSERVATIONS 3.1. We have made the following observations in the order of the proposed legislation in Schedule Paragraph 1 Disposals to which this Schedule applies 3.3. In paragraph 1(2)(c), reference is made to a disposal by a resident of an asset situated outside the United Kingdom [our emphasis]. A resident of where? We presume that this clause is intended to be relevant to a UK resident as presumably a non-uk resident holding an asset outside the UK does not have reporting requirements. Clarification of this point would be appreciated Paragraph 2: Obligation to deliver a return 3.5. Paragraph 2(4) requires that a person who has made two or more disposals in the same chargeable period which complete on the same day must report these disposals on the same RP-return. While no doubt it will be helpful to aggregate the disposals into a single return in many cases, it may be that it is easier in some cases to report the disposals separately, particularly if estimates have been made. This may be particularly relevant where an individual is, on the same day, completing the disposal of property held in their sole name and the disposal of jointly held property Suggested remedy: We suggest that the reporting individual is given an option and that the must is replaced with may. On the RP-return itself, a box to allow the individual to cross refer to any other same day transaction (or equally to any previous RP-returns for the chargeable period) may be helpful Paragraph 4 - Excessive payments on account 3.8. Paragraph 4 sets out the rules for computing the residential gain and determines which losses in the chargeable period can be offset. Only losses on disposals made before the completion date of the residential property disposal can be taken into account. Under the rules therefore, if an individual disposes of a residential property for a gain on 10 April 2020, they must report and pay the tax on the gain by 20 May If they then realise a capital loss which reduces the CGT due in the same tax year ( ), they cannot recover the overpayment until they have submitted their tax return, which would not generally be before 6 April 2021 at the

5 very earliest. In that case the payment on account will be held by HMRC for 10 months before it can be recovered by the taxpayer. This contrasts with the position for payments on account for income tax where, if the individual considers that their payments on account for their SA-return will be excessive, they can submit a claim to reduce their payments on account via an SA Suggested remedy: Provision should be made for amendments where, due to actual capital losses occurring after completion of the residential disposal and within the same year it is possible to make a free-standing reclaim (as opposed to amendment under paragraph 12) of some or all of the payment on account from the RP-return. Interest and penalties would apply if a reclaim was made on a careless or deliberate basis Paragraph 8 - Making of reasonable expectations and estimates Paragraph 8(6) provides for the individual to make an estimate of their income for the tax year in order to determine the appropriate CGT rate or rates. There is no specific provision for an individual to make an estimate of any valuations not yet received, or of splits or apportionment or other aspect of costs unknown. Given the short reporting timescale of 30-days post completion, and particularly in the period immediately following the introduction of the rules when individuals and their advisers will still be familiarising themselves with the new rules, it is likely that not all the necessary facts for an accurate payment on account will be known in all cases. We presume that it will be possible to make such reasonable estimates of base costs etc. as are needed in the circumstances to meet the reporting deadline for the RP-return Suggested remedy: We think that it will be important to have confirmation in the guidance that estimates can be made for other figures on the RP-return. Amendments could then presumably made under paragraph 12 as and when more accurate figures are received or established According to paragraph 43 of the Explanatory Note, the provisions in paragraph 8(2), (3) and (5) of the legislation deal with the position if a change in an individual s anticipated residency affects the amount of the payment on account due. If the residency changes and the payment on account increases, the individual is required to make an additional RP-report and pay the additional tax. Rather than process this as an amendment under paragraph 12, the individual is allowed to deem that an additional disposal, which replicates the initial disposal in all other respects, has taken place. They are permitted to ignore the actual disposal. We presume this provision is to ensure that the individual is given a further 30 days after it became reasonable to expect that their change in residency has occurred We consider that a changed residency situation will be difficult to manage in practice. At what point is the individual required to consider that their residency in the tax year has changed when, again, the final position based on day-counting may not be known until the end of that tax year?

6 3.15. Suggested remedy: In line with our comments on the purpose of payments on account at 2.7 above, we consider that it should be reasonable for the individual to make an assessment of their likely residency at the point of completion and make an RP-return on that basis. If their residency subsequently changes then this can be reported and the residential property gain amended through the SA-return when all of the facts are known Paragraph 9 - Contents of return Paragraph 9 sets out that an RP-return must contain information specified by an officer of Revenue and Customs. Given the interaction between the RP-return and the SA-return noted above, we suggest that the same information on a residential disposal should be required for both. Such consistency should help to simplify administration Given that it will be necessary to make estimates to complete the RP-return (for example, estimates of income to determine the correct rate of capital gains tax), we also ask for sufficient white space to be included within the RP-return for individuals to provide HMRC with any other information or explanations that they consider are relevant to the computation Paragraph 11 Requirement to notify HMRC of amounts chargeable to tax If an individual disposes of a residential property but is not otherwise required to be in self-assessment, under paragraph 11 they are permitted to deliver an RP-return instead of notifying under s7 TMA 1970 that they have a liability to CGT. However, they are still required to register for self-assessment under s7 TMA 1970 if the payment on account based on the RP-return is subsequently found to be insufficient In our consultation response, we suggested that there was a benefit to bringing all individuals who have made a property disposal within self-assessment for the year of disposal to ensure that all the repercussions of the property sale (increased investment income from proceeds, reinvestment in other assets which generate an income etc.) were picked up. As it is, a system of enquiries, determinations and discovery assessments has had to be introduced to the RP-return In discussions with HMRC, we asked what the position would be for where an individual, who was not otherwise required to be in self-assessment, found at the end of the year that they had paid too much tax based on their RP-return. For example, they could have over-estimated their income for the year and paid too much tax at the higher CGT rate. In this situation we are struggling to see that such an over-estimate of income would satisfy the conditions to be allowed as an amendment under paragraph 12. We understand from HMRC that it is likely this group would also need to be brought into self-assessment to correct the position Suggested alternative remedies:

7 Either all individuals who submit an RP-return are automatically registered for selfassessment (if they are not already) in order to ensure that an end of year reconciliation is completed via self-assessment, Or individuals who do not otherwise need to be in self-assessment and who have overpaid based on an over-estimate of their income in their RP-return are permitted by paragraph 12 to make an amendment for this reason following the end of the tax year Paragraph 12 Amendments of returns We have made a number of comments on paragraph 12 in the sections above: Section 2.3 to 2.6: A request for clarity on whether or not it is intended that the SA-return supersedes the RP-return, thus removing in some cases the need to complete an amended RP-return under paragraph 12. Section Where an individual has overpaid CGT on their RP-return due to an over-estimate of their income, but are not otherwise required to be in self-assessment, paragraph 12 is extended to allow the individual to amend their return on this basis. 4. SUMMARY 4.1. We would be happy to discuss any aspect of this response with you. Please contact our relevant technical officer Helen Thornley (hthornley@att.org.uk). Association of Taxation Technicians 28 August 2018