Conditionality: More Red Tape For Landlords?

Sarah Bradford looks at HMRC’s proposal to make compliance with certain tax obligations a condition for the holding of some licences, and what this might mean for landlords.

In December 2017, HMRC published a consultation document ‘Tackling the hidden economy: public sector licensing’. The document sets out proposals to tackle the hidden economy by introducing ’conditionality’ measures. Under the proposals, compliance with certain tax obligations would become a condition of holding some licences. Further, as part of the licensing process, checks would be undertaken on an applicant’s tax registration status.

The document sets out a number of licensing regimes, which it suggests would be suitable candidates for conditionality. It is outlines ways in which the proposed tax registration checks could be administered and enforced. 

The consultation document is available on the Gov.uk website at www.gov.uk/government/uploads/system/uploads/attachment_data/file/665924/Tackling_the_hidden_economy_-_public_sector_licensing.pdf. Comments on the proposals are sought by 2 March 2018. 

The idea of using conditionality to tackle the hidden economy was put forward in a consultation document published in August 2016. The original consultation did not propose firm policy measures, but rather sought views on the principles of conditionality and how it could be used to ensure tax compliance. Responses to the consultation were published in March 2017. HMRC also met with interested parties as part of the initial consultation process. 

The latest consultation builds on the information gathered from the initial consultation to identify suitable candidates for conditionality, and to put forward proposals for changes to introduce tax registration checks into the licensing process. 

As the name suggests, the term `hidden economy’ refers to those individuals and businesses with sources of taxable economic activity, which is entirely hidden from HMRC. For 2015/16 (i.e. the most recent tax year for which figures are available), the hidden economy tax gap is estimated at £3.5 billion. HMRC is committed to tackling the hidden economy. In doing so, it is noted that the best way to tackle non-compliance is to prevent it from happening in the first place. 

It is here where conditionality comes into play. No business acts in a vacuum, and by linking tax compliance with other approvals processes, such as those licences that a business needs to operate, it is hoped that businesses would come into the tax system at the right time, and once in the system would declare their income to HMRC and pay the tax that they owe.

Applying conditionality to public sector licensing

The document explores options for introducing tax registration checks as part of various public-sector licensing schemes. Several licensing schemes are flagged as appropriate, including those for houses of multiple occupation and selective licensing for private rented properties. 

In identifying licenses suitable for conditionality measures, HMRC took account of the following factors:

The consultation documents identify licensing schemes deemed to be suitable for conditionality. Included in the target list are licences issued under Housing Act 2004. The government believes that two licensing regimes in the housing sector would be suitable for conditionality measures:

A house in multiple occupation (HMO) is a property that is rented by at least three people who are not from one `household’ (for example, a family) and who share facilities, such as a kitchen and bathrooms. 

Licences are required for those who let out large HMOs. A `large HMO’ is one that meets all of the following conditions:

Landlords renting out a large HMO must apply to their council for a licence. A licence is valid for a maximum of five years, and must be renewed before it runs out. 

Conditions for a licence are set by the Department of Communities and Local Government (DCLG) in accordance with Housing Act 2004, Pt 2. Local authorities can add further conditions and set the licence fee. Under conditionality, the landlord would need to meet tax compliance conditions in order to demonstrate his or her suitability for a licence. HMRC believe that applying conditionality to HMO licences would encourage landlords to ensure that they are tax compliant before renting out their properties.

The other type of housing licence identified as suitable for conditionality measures is selective licensing for private rented properties. Housing Act 2004, s 80 enables a local authority area in England and Wales to introduce selective licensing of private rented houses in order to tackle problems caused by low housing demand or by significant anti-social behaviour. 

The grounds for introducing a selective licensing scheme were widened in 2015 to include poor property conditions, high levels of migration, high levels of deprivation, and high crime. Where a selective licensing designation is made to an area, all privately rented properties in the designated area must have a license. 

HMRC believe that there is scope to introduce tax registration checks into selective licensing schemes, where appropriate and proportionate. 

Under conditionality, tax registration checks would be incorporated into the process of applying for a licence. The consultation document looks at how this could be achieved. The document sets out a broad approach which could be adopted, but views are sought on ways in which this could be adapted.

Under the suggested approach, new applicants would be signposted towards tax obligations and HMRC services. However, it is recognised that when an applicant applies for a licence for the first time, they may not yet need to be in the tax system, and may not yet be trading. Consequently, the checks for new applicants could focus on ensuring they understand their tax obligations, rather than checking that they are registered.

Where a licence is held, that licence will need to be renewed periodically. It is at the renewal stage that tax registration checks would be carried out, because at that stage the applicant is very likely to be trading or earning income from operating in the sector. The applicant could be required to demonstrate their tax registration status before the licence renewal is processed. 

The consultation document suggests methods by which tax registration could be demonstrated, including the provision of evidence generated through online accounts, or by providing other official documentation from HMRC, such as a notice to file. Where evidence of tax registration is not provided, the local authority could refuse to process the licence. However, safeguards will apply to ensure that a licence can still be renewed where a person has a reasonable excuse for not being registered; for example, where a licence is held but no income is generated from it. 

Conditionality will mean that landlords applying for a HMO or for a licence for certain private rented accommodation will be required to demonstrate that they are within the tax system if their licence is to be renewed. New applicants will need to show they understand their tax obligations.

To support the new system, new powers may be required to allow HMRC to disclose information to licensing authorities.

The introduction of conditionality will inevitably involve additional work. However, the consultation document also considers how the burdens can be minimised for both customers and licensing authorities. Consideration is also given as to how the impact on an applicant privacy can be minimised.

The government will evaluate the responses received to the consultation and bring forward draft legislation for further comment. It is therefore a matter of ‘watch this space’.