HMRC’s OTM Letters Campaign Directed At ATED Avoidance

The UK tax authority HMRC has commenced a One to Many (OTM) letter campaign targeting offshore companies that own UK residential property valued above ￡500,000. HMRC is particularly targeting companies that reported consecutive losses on their property rental income from 2017/18 to 2019/20 while possibly claiming tax benefits they shouldn't.

The campaign's goal is to make sure those companies are following the tax rules under the Annual Tax on Enveloped Dwellings (ATED) provisions.

Understanding ATED and QPRBR

ATED is an annual tax that applies to companies and other entities (not individuals) that own UK residential properties north of ￡500,000. The tax amount depends on the property's value but businesses that meet certain conditions can apply for relief.?

Related to this, we can talk about a major relief that is Qualifying Property Business Relief (QPRBR). This relief applies if the property is rented out commercially with the aim of making a profit. However, that relief cannot be claimed if the property is used by people linked to the company or those with an interest in it. Also, ATED reliefs are not given automatically: they must be claimed each year in tax filings.

Should You Be Concerned About the OTM Campaign?

Through its latest OTM campaign, HMRC is targeting the following types of offshore corporates:

• Owns UK residential property valued over ￡500,000
• Reported consecutive rental losses in their Self Assessment Tax Returns from the Tax Year 2017/18 to the Tax Year 2019/20
• Either filed ATED returns claiming QPRBR or failed to file ATED returns altogether

HMRC believes businesses that always report losses are unlikely to qualify for QPRBR. As a result, it is suspected that some companies should be paying ATED but haven't properly reported it.

Four Types of Letters Issued by HMRC

HMRC has expressed the intention to continue to issue the letters over the next few months. It has sent out four types of letters so far.

• For companies that have filed ATED returns and claimed QPRBR
• For companies that have not filed ATED returns but may have assumed QPRBR applied
• Variations of the above for companies represented by an agent
• Variations for companies that are unrepresented

Each letter is accompanied by an encompassing schedule that lists the information and documents HMRC expects in response. Companies that receive these letters should check their filings, fix any mistakes and follow the rules going forward.

What Action Should Companies Take?

Companies receiving these letters must act promptly. If the company determines that it owes ATED liabilities, it should disclose this to HMRC and file the necessary returns. If it believes it qualifies for QPRBR, it should submit supporting documentation to HMRC. Or, if it has not submitted the required returns, it should do so immediately to avoid penalties.

Companies must reply within 40 days of receiving the letter. If they don't, HMRC may issue a discovery assessment, estimating the tax due and possibly adding penalties and interest for late payment.

Why This Matters

The campaign shows HMRC is paying closer attention to tax relief claims for property businesses. Companies wrongly claiming QPRBR or not meeting their ATED obligations could be hit with serious financial penalties.?

HMRC will keep sending these letters in small batches over the coming months and into the 2025/26 tax year to reach a wide range of affected companies.

Conclusion

HMRC's stricter enforcement of ATED compliance is part of a wider global effort to improve tax transparency. Companies that own UK residential property should review their tax filings to comply with the rules and avoid unexpected liabilities.

Since HMRC will keep sending letters over the next year, businesses should act now to fix any errors and lower the risk of future tax investigations.?You can contact?UK Property Accountants for further information or assistance.