ATED – The tax that wasn’t supposed to raise tax

By Yedidya Zaiden – Raffingers

I am writing this article because I have just had a client who had no tax to pay but has been levied penalties of over £3,500!

ATED stands for Annual Tax on Enveloped Dwellings. It was introduced in the budget of 2012 as a means to discourage people from buying high value residential property inside the ‘envelope’ of a limited company.  The chancellor viewed properties held within companies as a form of tax avoidance. Stamp Duty Land Tax (SDLT) on the purchase of a residential property worth £2m back in 2012 was £100,000. Stamp Duty on shares in a UK company in only 0.5% and is not chargeable on a non-UK company. Holding property within a company, and then selling the shares rather than the property itself, results in significant tax savings.

To discourage taxpayers from holding residential property within a company, the ATED regime introduced amongst other measures, an annual charge levied on the company. Initially the ATED regime only applied to properties valued at £2m and over. This was reduced with the charge now applicable to properties valued at £500,000. The annual charges range from £4,400 for properties worth between £500,000 and £1 and £287,500 for properties valued at over £20m.

You will notice that the annual charges are fairly low and were not intended to fill the gap resulting from the lost SDLT. In fact HMRC report the tax raises just under £120m a year (85% from properties in London), a relatively small sum. However, it seems that the treasury relied on the “nuisance factor” of having additional returns and costs every year as a way to discourage enveloping of properties.

There are a number of reliefs from having to pay the charge which, if applicable must be claimed on the annual return. These include property rental businesses where the business is run on a commercial basis, with a view to making a profit, and where a ‘non-qualifying person’ (broadly a person connected to the company) in not occupying the property.

ATED returns must be submitted within 30 days of the purchase of a qualifying property. The annual returns must be submitted between the 1^st and 30^th of April.

The big trap for ATED is that a return is due each year even if there is no tax to pay, and late filing penalties are charged if that ATED return is not delivered on time. The penalties are –

1. £100 when the return is one day late
2. £10 per day for up to 90 days when the return is three months late
3. The greater of £300 and 5% of tax due when the return is six months late
4. The greater of £300 and up to 200% of tax due, when the return is 12 months late

My client purchased a residential property and was not aware that he had to file an ATED return within 30 days. As the company’s accounts weren’t due until 18 to 20 months after the purchase, by the time we were instructed, the penalties for missing the initial ATED filing and the subsequent filing due that April exceeded £3,500.

Hughes Property Partnership Limited purchased a property and as a result of a number of factors, submitted their ATED return 238 days late. HMRC levied a penalty of £1,200 and the company took the case to Tribunal in May 2023. Amongst other reasons, its appeal against the penalties was based on the following:

(a) HMRC did not issue a notice to the appellant notifying them of their obligation to file an ATED return.

(b) The return was a relief return so there was no tax due.

(c) The penalty of £1,200 was not justifiable for a nil return.

(d) The late filing was not deliberate.

(e) The appellant had no history of being late or non-compliant with their HMRC obligations.

The judge ruled that as HMRC do not know of the requirement to file until a return is filed, they do not have to issue a notice; penalties do not have to be proportionate; HMRC does not have the power to reduce the penalties on the basis of some generalised unfairness; and it cannot take into account the taxpayer’s good compliance record before or after the failure to file.

The appeal was dismissed, and the penalties were confirmed.

According to HMRC statistics, the number of liable declarations made in 2021/22 was 4,810  a reduction of 7% on 2020/21 whilst the number of relief declarations rose by 5% to 22,910 in the same period. As HMRC have lowered the reporting threshold from £2m to £500,000 and as property values rise, more and more companies are being brought into the regime but most of these are not liable to the tax.  This results in a huge administrative burden on companies, and in my view, unnecessary penalties where directors are simply unaware of the charge.

My advice would be to keep this on your radar. If you are buying a property, don’t expect your conveyancing solicitor to advise you of the charge. Speak to your accountant and make sure that you submit the returns on time.

Yedidya is a Partner at Raffingers, a top 100 accountancy practice that specialises in strategic business, tax planning, charities and commercial business solutions. If you would like to discuss any aspect of this article or for any other business or accounting advice, please email Yedidya Zaiden at yedidya.zaiden@raffingers.co.uk

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