Why it’s not always advantageous to be in the spotlight…

HMRC has been using its spotlight feature for a number of years to highlight what it considers to be egregious tax avoidance arrangements, with the dual aim of discouraging future participants and encouraging existing users of such planning to settle with HMRC. The latest in the series is spotlight 63, published on 4 October 2023 and titled ‘Property business arrangements involving hybrid partnerships’. So why is this rivetingly titled spotlight of interest? 

Following the growth of the buy to let (BTL) market during the 2010’s, the government introduced two key measures to try and quell the explosion in the market: the phased restriction of tax relief for mortgage interest between 6 April 2017 and 5 April 2020 and the introduction of a 3% stamp duty land tax (SDLT) surcharge on new BTL purchases, from April 2016. 

These actions resulted in a decrease in the number of landlords between 2016 and 2023, with an average net reduction of 37,173 landlords each year, while simultaneously increasing the treasury tax yield from the remainder. The restricted finance relief provision alone was anticipated by HMRC to raise more than £660m per year from 6 April 2020. This created an opportunity in the market for some advisers to try and circumvent the intention of the legislation via the use of corporate and hybrid LLP structures involving both individual and corporate members.

HMRC has, however, now nailed its colours to the mast on the subject of the hybrid structures at least, stating it believes existing anti avoidance legislation means the planning does not work and urges users to make contact using a dedicated email address to discuss settlement (spotlight63@hmrc.gov.uk), although at this stage HMRC has not provided any details of what this settlement may look like.

HMRC is looking to send a clear message to deter the spread of what it perceives to be aggressive tax planning. This extends to warning advisers operating in this sphere that they may fall within the realms of the disclosure of tax avoidance schemes (DOTAS) legislation, which can result in large penalties for failing to report the arrangements, all of which could be a precursor to an uptick in future HMRC activity in this area. 

Those choosing the HMRC settlement route will require professional advice in unravelling their affairs, a fact acknowledged by HMRC, as it may involve tax, legal and financing implications.