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16 September 2009

A company director and secretary receive rental income from

their limited company for office space at home. Relief has been

claimed on the directors personal tax return under rent-aroom relief, but is this correct?
We operate as a small tax consultancy from our respective houses (director and secretary); due to
the geographical spread of our clientele we find this commercially efficient.
Some years ago, an article suggested that the rent-a-room legislation as originally drafted in
F(No2)A 1992 did not exclude arrangements such as ours whereby the company pays rent to the
key employees for offices, etc.
It also noted that HMRC do not agree with this analysis so, as the director, I flagged up on my
returns that I was claiming rent-a-room exemption and have not heard anything since I started
doing this five years ago.
In the case of the secretary (who is not in self
assessment), correspondence is now taking place
with HMRC, who are disputing the exempt
treatment referring, among other things, to
Pepper v Hart and the intention of the legislation.
If the intention of the legislation was to exclude
companies the draftsman could have done so. Do
readers agree?

Query 17,468 Downland

Reply from Sparta

Although there is doubt that the position is quite
so clear cut as HMRC maintain, the Property Income Manual at PIM4002 sets out their
interpretation of the legislation and most would see little merit in disagreeing.
Rent-a-room relief was introduced in the 1992/93 tax year and some will recall that there was
initially considerable speculation in the professional press over whether a householder could let a
room in their home to their own limited company with the rent qualifying for the relief in the
landlords hands.
The double attraction of extracting funds from a company free of both National Insurance and
income tax suggested that it was only a matter of time before HMRC publicly clarified its position.
Downland does not give details of the article he refers to or when it was published, although any
ambivalence in HMRCs position regarding office accommodation and any inherent ambiguity in the
legislation pertaining to the relief evaporated in the summer of 1994 with the publication of Tax
Bulletin 12.
The detailed guidance set out in the bulletin and indeed in Revenue Interpretation 80 has since
been superseded by PIM4002.
However, HMRCs stance in the Property Income Manual at PIM 4002 has remained consistent over
the last 15 years. Whether readers instinctively agree with Downlands contention or not, the reality

is that any attempt to capitalise on the relief in spite of HMRCs well-known policy is a strategy which
carries considerable risk.
If Downland wishes to pursue his claim to the relief in the face of such long established practice the
narrative of the bulletin leaves him in little doubt that he must be prepared to take a detailed and
sustainable case before a tribunal and, in the event of a successful outcome, to continue the fight
through the courts to its bitter end.
HMRC will not give ground in this area and have served notice that they will take it all the way if
challenged. Given the costs involved in resisting he should consider whether other interested
parties would support him in taking
a test case and in engaging tax counsel.
The decision in Pepper v Hart [1992] STC 898 enables courts to consider the intention behind
statute as revealed through ministerial statements and other Parliamentary material where
appropriate.
Although Downland must be prepared to trawl through Hansard, an exchange between the
Chancellor and Mr Raynsford on 26 January 1994, a few months before Tax Bulletin 12 was
published, referred to the tenants under the legislation as lodgers which leans toward HMRCs
interpretation.
The principle has been applied in a number of well-known tax cases although Downland may wish
to study the non-tax cases of Robinson v Secretary of State for Northern Ireland and Others HL
[2002] UKHL 32 and R (oao Westminster City Council) v National Asylum Support Service HL [2002]
UKHL 38 for possible restrictions to the principle that such material can be used as an aid to
interpretation.
Downland should examine the past five years submitted returns to confirm precisely how the rent
received was disclosed in his claim to HMRC. Given that SA105 Notes and Help Sheet 223 make it
clear that HMRC will resist a claim that rent-a-room relief applies in cases where a room is used for
business purposes, anything less than a consistently comprehensive disclosure of the amount and
circumstances of the claim may lead HMRC to question whether Downland correctly self assessed.
Downland advises that the secretary is not in self assessment, but does not explain why this is so.
Presumably income from the company is paid under PAYE or the secretarys total income excluding
rental receipts is covered by the annual exemption.
Again, given the guidance in the self assessment notes, help sheet and manual, HMRC is likely to
adopt the view that the secretary had an obligation to submit self assessment tax returns for all
years in question and to declare the rental income received. In this event there will have been a
failure to give notice under TMA 1970, s 7.
In addition, Downland should be prepared for any deduction claimed by the company against
corporation tax to be questioned on the grounds that the payments of rent were not made wholly
and exclusively for the business because the arrangements were fiscally motivated.
In short, Downland should conduct a thorough risk assessment before deciding whether to concede
and try to limit the damage or whether to attempt to overturn HMRCs policy. It is thought that
there has not been a successful test case in this area to date.

Finally, given the nature of Downlands business he should consider whether comparable advice has
been provided to and acted on by clients as part of his risk assessment.

Reply from Magnus

I can see where Downland is coming from in this case, but I fear that he is flogging a dead horse
and will not succeed.
Rent-a-room relief was introduced by F(No2) 1992, s 59 and Sch 10. Minor modifications were made
in FA 1995 and from 2005/06 the legislation is found in ITTOIA 2005, s 309 and Part 7 Ch 1.
Rent-a-room relief applies to furnished residential accommodation in the taxpayers only or main
home. It applies to ordinary letting of living accommodation.
Genuine lodgers who study at home or do some of their business work at home in the evenings or
at weekends do not disqualify the exemption due to the lessor.
The subject is dealt with in HMRCs Property Income Manual at PIM4001 to PIM4060. The issue of
letting a room as office accommodation is dealt with specifically in PIM4002, and HMRC officers
have been advised to refuse claims for rent-a-room relief in such circumstances.
HMRCs views were set out in some detail in Tax Bulletin 12 of August 1994, and it is worth
reproducing the text as follows:
There have been some suggestions in the professional press that (rent-a-room) relief could
be available where a residence, or part of a residence, is used as an office or for other trade
or business purposes (other than the business of providing furnished living accommodation)
and sums are paid in respect of that use. We take the view that such claims are inadmissible
since:
the words of the legislation, in our opinion, do not permit such claims; and
the legislation was never intended to give relief in such circumstances.
Where a room is used exclusively as an office or as other trade or business premises, it is no
longer occupied or intended to be occupied as a separate residence one of the conditions
for rent-a-room relief. As such, it is no longer, for rent-a-room purposes, part of the
residence because F(No2)A 1992, Sch 10 para 7 permits the identification of parts of
buildings which are occupied or intended to be occupied as a residence.
Rent-a-room relief can only apply where relevant sums accrue in respect of the use of
furnished accommodation in a qualifying residence. The Act does not define
accommodation which should therefore take its everyday meaning. The dictionary meaning
of accommodation is lodgings or a place to live and in our opinion, the normal
unqualified meaning of accommodation is living accommodation. Consequently, even if an
entire residence, or part of a residence, is used as trade or business premises and payments
are made in respect of that use, we take the view that rent-a-room relief will not be due. The
payments will not have been made in respect of the use of living accommodation as such.
The standing committee debate in Parliament on rent-a-room indicates the context is which
rent-a-room was being considered was that of providing residential accommodation and not
office or business accommodation. We do not think that the legislation is ambiguous or
obscure. However, should commissioners, for example, consider that it is, then following the

decision in Pepper v Hart[1992] STC 898 it may be possible for them to refer to relevant
Parliamentary material. This material supports our interpretation that lettings other than
furnished lettings are excluded from rent-a-room relief.
The foregoing does not apply to genuine lodgers such as students who are provided with
study facilities in their lodgings. In such cases we would not want to deny relief where a
lodger living in the home is provided with a desk, or the use of a room with a desk, which he
or she uses for work or study.
Downland could appeal to the tribunal, but this could be costly and one would not regard his
chances as good. In addition, he may well be in danger of an HMRC enquiry into his own affairs if he
has continued to assume that rent paid by his company to him can come under the rent-a-room
banner.

Reply from Goldstone

Fact, the rent-a-room legislation was originally created for residential and not commercial purposes.
HMRCs tax return UK property notes on page UKPN 2 advises: If you let a furnished room or rooms
in your own house (excluding a room used exclusively as an office).
The availability of rent-a-room relief is set out in ITTOIA 2005, s 309, and sections 784 to 802. There
is also extensive commentary of the subject in HMRCs Property Income Manual at PIM4001 to
PIM4060.
HMRCs Help Sheet 223 also provides practical commentary on claiming the relief and on page 1 it is
mentioned that rent-a-room does not apply to income from accommodation used as an office or
for business other than by genuine lodgers.
The relief is available for sums accruing to an individual in respect of the letting of furnished
accommodation in his only or main residence. Letting of rooms as office accommodation is not
accepted by HMRC as qualifying for the relief (see PIM4002).
The fact that Downland has had the sense to include notes in the white space as to what he has
entered regarding rent-a-room income is in his favour.
It appears that once the usual enquiry time limit has passed that was 31 January following the
previous 31 January filing date HMRC have their hands tied and will not be able to amend the
entries for the 2005, 2006 and 2007 tax returns, and possibly the 2008 return.
Please note that the deadline for 2008 returns onwards is as per FA 2007, s 96, which amended TMA
1970, s 9A(2); that is, 12 months after the date that the tax return was filed.
The Property Income Manual at PIM4002 (Letting as office accommodation) starts with a denial of
relief where rooms in private homes are let as office accommodation. It then reproduces Tax
Bulletin 12 (August 1994 Rent-a-room. Accommodation used for trade or business purposes),
which details HMRCs views on the subject.
Basically, what they are trying to say is that nowhere in the legislation does it definitely say that
income received from the letting of a room in a house which is used for business purposes does not
qualify for rent-a-room relief claims, and that we take the view that such claims are inadmissible
since:

the words of the legislation, in our opinion, do not permit such claims; and
the legislation was never intended to give relief in such circumstances.
PIM4002 then goes on to say that the Act does not define accommodation, which should
therefore take its everyday meaning. The dictionary meaning of accommodation is lodgings or a
place to live and in our opinion, the normal unqualified meaning of accommodation is living
accommodation.
Also mentioned is the matter of a standing committee debate in Parliament on rent-a-room, which
indicated that the context in which rent-a-room was being considered was that of providing
additional residential, and not office or business, accommodation.
The current legislation under ITTOIA 2005, s 786 (Meaning of rent-a-room receipts) comes much
nearer to defining the intentions of Parliament.
(1) For the purposes of this Chapter an individual has rent-a-room receipts for a tax year if (a)
the receipts are in respect of the use of furnished accommodation in a residence in the UK or
in respect of goods or services supplied in connection with that use
(2) Meals, cleaning and laundry are examples of goods or services supplied in connection
with the use of furnished accommodation in a residence.
From this, it can be seen that in s 786(2) the first and third examples are more conducive to living
accommodation rather than business usage.

Reply from Exile

I have a couple of general comments on the approach adopted here.
First, for 2005/06 onwards FA 1992 is irrelevant. Rent-a-room is covered by ITTOIA 2005, s 784 et
seq. Downland should check the wording of the legislation rather than rely on an article that
suggested that rent-a-room relief applied.
Second, it is clear that HMRC do not agree that rent-a-room applies to the use of office space. It is
absolutely nothing to do with limited companies. HMRCs view is that the legislation does not apply
to payments for office accommodation whether paid by a limited company or an unincorporated
business.
HMRCs views are set out in the Property Income Manual at PIM4002 (Rent-a-room: letting as office
accommodation). I am disappointed in the paragraph, however.
It reproduces Tax Bulletin 12 from 1994. That is interesting, but a reference to the bulletin shows
that the article has been superseded by PIM4002. Still, the circularity of the references keeps us
spinning.
Of a more serious comment is the fact that the paragraph analyses F(No2)A 1992 and then says that
ITTOIA 2005 is similar. Surely, the manual should be updated to analyse current legislation and
refer fleetingly to old legislation.
Third, I do not know the nature of the disclosure on Downlands return. Did it simply state that renta-room relief was claimed. If that is the extent of the disclosure, it will be insufficient to protect
against a discovery assessment.

Finally, we often use Hansard to explain where the legislation is in doubt. I do not think that such a
use can be one-sided. The reference to Hansard is in accordance with HMRCs guidance in the
paragraph quoted above.
With those comments, I can now answer the question. The relief applies to individuals not
companies. Therefore, in that respect the draftsman has excluded companies. The individual must
be receiving rent for furnished accommodation in a residence.
That seems to me to exclude a partial use of home as office. Downland may argue that a reference
in Tax Bulletin 12 and the manuals is not clear enough. However, Help Sheet 223 states:
Rent-a-room does not apply to income from accommodation used as an office or for
business other than by genuine lodgers (for example, students who are provided with study
facilities in their lodgings, or lodgers who do some work in your home in the evenings or
weekends).
The statement is clear. HMRC are not always correct, but I would worry about submitting a return
that includes a treatment that is against HMRCs views without making sure that the disclosure with
the return is completely beyond any form of misunderstanding as to what has happened. Simply
claiming the relief is insufficient.

A closer look... letting income and rent-a-room relief

The replies to the above query consider whether the rent-a-room relief income tax exemption can
be used to reduce the liability on income received by a director from his limited company for use of
a room as an office.
The replies mention Parliamentary debates. On 26 January 1994, Mr Raynsford asked the Chancellor
of the Exchequer for an estimate of the revenue forgone as a result of the introduction of the renta-room scheme under which owners of property can receive tax relief on certain income for
lodgers.
He did not in fact obtain the information, but this does imply that the relief was for income from
lodgers.
Perhaps a clearer indication of the intention of the legislation can be found in a statement in
Parliament on 23 November 1992, when the Parliamentary Under-Secretary of State for the
Environment (Mr. Tony Baldry) was addressing the issues of encouraging private lettings.
He said:
We should not, of course, overlook existing resources and I should mention three initiatives
we have launched to make better use of existing housing.
He mentioned a scheme to allow housing associations to act as intermediaries between potential
private landlords and tenants and a flats-over-shops scheme, designed to bring properties back into
use.
He then said:
Thirdly, we have introduced a new tax relief, the rent-a-room scheme, to give incentives to
owner-occupiers and tenants to let rooms to lodgers ... No tax will be payable on the first

3,250 of rent received.

In the Commons on 9 December 1992, in response to a request for an estimate of additional units
of accommodation brought into use by the rent-a-room scheme, Sir George Young replied:
It is not possible to give a precise figure. The nature of lodging makes it difficult to measure
accurately the size of the sector. We hope, however, that the new scheme will encourage an
increase in the number of people who take in lodgers.
These statements certainly seem to support the line taken by HMRC in their manuals at PIM4002 in
this regard.

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