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Monthly Archives: May 2019

Tenant Fees Act 2019 – Greater Protection for Tenants in England in the Private Rented Sector

As part of the Government’s drive to make renting fairer and more affordable, and to improve transparency and affordability in England’s residential lettings market, the private rented sector in England faces further changes in the shape of the Tenant Fees Act 2019 (‘the Act’) which comes into force on 1 June 2019.

This Act prohibits landlords and letting agents in the private rented sector in England from charging certain fees to a tenant. Financial penalties apply for non-compliance and, for repeat offences, further fines and a possible criminal conviction. Landlords and letting agents will not be able to evict a tenant using the section 21 eviction procedure until they have repaid any unlawfully charged fees or returned an unlawfully retained holding deposit.

It is important that residential landlords and letting agents are prepared for these changes and should ensure that their business models, internal practices and procedures are compliant with the Act when it comes into force on 1 June.

Which Tenancies are Affected?

Assured shorthold tenancies, licences to occupy (excluding social housing), and student lettings in England granted on or after 1 June 2019 will be affected. If a tenancy was granted before 1 June 2019, payments which may be prohibited under the Act can still be charged but only until 31 May 2020.  From 1 June 2020, all tenancies and licences (previously referred to) will be caught by the Act.

What Payments are Permitted Under the Act?

A tenant can be charged:

  • Rent.
  • A refundable tenancy deposit (capped at five weeks’ rent if the yearly rent is less than £50,000, or six weeks’ rent if the yearly rent is £50,000 or more).
  • A refundable holding deposit (capped at no more than one week’s rent); strict time frames have been introduced for repayment.
  • Certain ‘default’ fees, which must be written into the tenancy agreement – payment for a lost key and interest for late payment of rent (if the rent is unpaid for more than 14 days). The rate of interest must not exceed the rate of 3% above the Bank of England base rate.
  • Utilities / Communication services / TV Licence / Council Tax (only the billed amount).
  • £50 fee for the landlord’s consent to vary a tenancy agreement as requested by the tenant.
  • An early termination fee (in the event the tenant wishes to terminate early, but not where the tenant is exercising a break clause).

What Payments are Prohibited?

Landlords, or letting agents on their behalf, are prohibited from charging tenants any fees which are not permitted payments (described above).

For example, letting fees (such as administration fees, obtaining references, preparation of inventories, credit checks) cannot be passed on to a tenant and must be fronted entirely by the landlord.

A common clause in a tenancy agreement requiring a tenant to pay for a professional clean at the end of the tenancy is now a prohibited payment. It is permissible to require a tenant to clean to a professional standard, but not to pay for a professional clean.

What are the Penalties and Consequences for Non-Compliance?

Landlords and letting agents can be subject to a fine of up to £5,000 for a first offence. If a further offence is made within five years of the first, this will be a criminal offence and a landlord or letting agent could be liable for an unlimited fine. Some local authorities may impose a financial penalty of up to £30,000 as an alternative to prosecution.

To find out more about the Tenant Fees Act, why not take a look at our all new Guidance Note? This new document is available here.

As a result of the wide impact the Act will have on the private rented sector in England, several of our template documents on the Property portfolio are being updated, most notably the Assured Shorthold Tenancy (AST) Agreements. These updates will be published before the Act comes into force.

In related news, the Renting Homes (Fees etc.) (Wales) Bill, has passed through the Welsh Assembly and is awaiting Royal Assent. Similar provisions to the Tenant Fees Act 2019 are proposed under this Bill. We will produce further guidance and updated documents once this Bill has passed into law.

As a landlord or letting agent do you believe these legislative changes will necessitate an increase in rent (even if this is a negligible increase) and therefore preferable to a tenant being charged up-front fees? Is Buy-to-Let less attractive now? Your comments are, as ever, welcome!

Important Changes to IR35 Coming in 2020

HMRC Sign

Are you a freelancer who works through a Personal Services Company (“PSC”), or do you engage freelancers who do so? If so, you need to be aware that the tax position will be changing in April 2020.

Proposed Changes to Off-Payroll Working Rules (IR35)

The Government issued a Policy Paper and Consultation Document on 5 March 2019 (“Off-Payroll Working Rules From April 2020”). If you would like to read the paper in full, you can find it by clicking here. The consultation runs until 28 May 2019, but it is clear that the Government does not intend to make any significant changes to its proposals as a result of feedback it receives to this consultation.

A Finance Bill will be published in the summer and, once it is passed into law, it will implement changes to how the IR35 regime works. Although details of the proposed changes will not be known until the Bill is published, the points covered in the Government’s March 2019 consultation indicate the nature of the changes that will come into effect in April 2020. In this post, we consider some of the proposed April 2020 changes set out in the consultation.

Background to the Changes

Working via a PSC (or some other form of intermediary) is often referred to as “off-payroll working”, and the tax rules that apply to it are usually referred to collectively as “IR35”. IR35 does not alter or dictate the employment law position either as to workers’ rights or as to whether someone is employed as opposed to self-employed. Nor does IR35 alter the general tax law establishing the amount of tax liability.

As it currently operates, and as it will operate from April 2020, IR35 is only, in effect, a means to aid collection of the full and correct amount of tax and National Insurance (“NI”) to be paid in respect of certain payments where a freelancer works through a PSC. To find out more about IR35, check out our guidance notes IR35 as background to the latest changes to IR35 being proposed by HMG. You can find our guidance notes here and our information pages here.

Operation of IR35 from 2000, and Recent Developments

The operation of IR35 depends on identifying where a freelancer working for a client through a PSC is, in substance not form, an employee of that client. When IR35 was originally introduced, the rules required the PSC itself to identify whether use of the PSC to receive gross payments from a client in any instance was “disguised employment” by the client and to arrange payment of tax and NI under PAYE if that was the case.

Freelancers (and sometimes family members) are usually the only directors and/or shareholders of a PSC. Perhaps unsurprisingly, the Government found that PSCs could not be relied upon to implement the IR35 rules. PSCs commonly paid dividends to the freelancer (as a shareholder of the PSC) rather than a full (or any) salary to the freelancer. As a result, PSCs did not pay the tax or NI that would have been paid had they paid a salary derived from the gross payments made by clients.

Consequently, under a change in the law in 2017, the Government began to implement anti-avoidance measures. Since April 2017, where the client is a public sector entity, the burden of assessing the tax status of freelancers shifted on to the public body concerned, so that it, not the PSC, is responsible for identifying such “disguised employment” situations. Where the public sector body does so in any case, it must operate PAYE and make net payments to the PSC. Many, including IPSE (the Association of Independent Professionals and the Self Employed), think that these changes have had damaging effects on the public sector, and that any extension of these changes to the private sector will be also be damaging for all concerned.

The April 2020 Changes to IR35

Since late 2017, the Government has indicated its intention to extend similar changes to the private sector, although the April 2020 changes will differ in some respects from the measures that currently apply to the public sector. From April 2020, the private sector client will be responsible for determining whether the freelancer is a “disguised employee” and therefore to be treated as if an employee. If the entity in the labour supply chain which pays the fees to the PSC is not also the client of the PSC, then the fee payer will be responsible for operating PAYE. If the client determines that IR35 does not apply, then the client or the fee payer will pay the PSC gross.

However, these new rules will not apply to all private sector clients. The legislation will provide that clients which are “small” entities will not be involved in having to determine freelancers’ status and, whether or not the client is also the fee payer, the fee payer will not need to operate PAYE. For this purpose, “small” means that if the client is corporate, the rules will not apply to it if it falls within at least two of the following:

  • Its annual turnover does not exceed £10.2 million;
  • Its balance sheet total does not exceed £5.1 million;
  • The number of its employees does not exceed an average of 50 in the year.

If the client is non-corporate and it is “small”, the rules will similarly not apply to it. The criteria for “small” have not yet been made clear, but they will fairly closely follow the criteria for corporate entities.

This means that where a client in the private sector is “small”, the responsibility for determining the freelancer’s status will remain with the PSC as at present.

Before deciding whether IR35 rules apply, are they even relevant to you?

These 2017 and 2020 changes to how IR35 operates only impact on any case where IR35 is relevant, i.e. where a PSC is involved. If a freelancer does not work through a PSC but through some other type of entity (e.g. an agency or managed service company), then other rules will or might apply, so it is important to understand what amounts to a PSC for the purposes of IR35.

So, if you engage a freelancer working for you directly as opposed to working through a PSC, you will not be affected by IR35. However, as a consequence of normal tax law (not IR35 rules) applicable in these cases, you will still need to decide whether they are an employee rather than a sole trader or contractor. If they are an employee, you will have to operate PAYE.

Determination of a Freelancer’s Status

Although clients will need to apply the normal employment status tests (based on case law – see our helpful tips, here) to decide whether someone is a “disguised employee”, it can be difficult to do so, and that difficulty is aggravated by the fact that HMRC’s view of status in a case cannot necessarily be regarded as correct. Where HMRC has contested the status of contractors in tax tribunals, it has lost a large percentage of them.  HMRC provide a tool, the Check Employment Status Tool (“CEST”), which clients may (but do not have to) use to assess employment status. CEST’s reputation has unfortunately become somewhat sullied due to many public sector clients finding that it is biased towards finding that an individual is an employee. This has not inspired confidence amongst freelancers or their clients. HMRC has said that it will enhance CEST to make it more suited to the private sector.

New Information Requirements

Currently, where the client is in the public sector, it must tell the entity it contracts with of its determination of the freelancer’s status. From April 2020, the Government intends to introduce new IR35 rules that will require private sector and public sector clients to inform both the entity they contract with and the freelancer or PSC of their determination and, if requested, the client’s reasons for it.

HMRC also intends the rules to require all intermediary recipients of the determination (i.e. those in the chain other than the client and the freelancer or PSC) to pass it and, if requested, the reasons for it, to the person with whom they contract.

Status Determination Disputes and Anti-Avoidance Measures

The proposed new rules for the private sector are likely to include mechanisms for challenging decisions as to whether or not a freelancer is within IR35, and a means for resolving such disputes. Where a party is initially liable to determine status and does not do so, or does so without reasonable care, or if it does not fulfil any other IR35 obligation, it will be made liable for tax and NI even if it is not the fee payer. Where a party is liable for tax and NI but in the event it cannot be collected from that party, the rules are likely to have the effect of moving liability to the next entity in the labour supply chain.

Impact of Changes on Your Business and Action Needed Now

The changes might have an effect on you if you are a freelance business or your business engages freelancers. The effects might include an increase in the burden of administration work, the cost of that extra work, practical difficulties in operating within the changed rules, and the commercial and financial impact on your business.

With less than a year to go before new rules come into effect, it is very important that you start now to take steps to prepare for the new IR35 rules if you do engage any freelancers through intermediaries. There are numerous steps that should be considered. It is recommended that you begin by identifying those freelancers working for you through intermediaries and the labour supply chain in each case, and then implementing processes to determine freelancers’ status. Further steps are likely to be advisable, and we recommend that you seek advice or guidance on these from suitable advisers or sources.

As always, if you would like to share your thoughts as to whether and how you think these proposed changes will impact you or others with whom you deal, we would be glad to hear from you in the comments, below.

Proposed Mandatory Requirements for Landlords to be Members of a Redress Scheme

Houses with red doors

Earlier this year, the Government gave its response to the consultation on ‘Strengthening Consumer Redress in the Housing Market’.

This consultation ran for two months at the beginning of last year and considered the current procedure for addressing complaints and disputes in the housing market and whether the process could be improved.

The Government wants to focus on empowering tenants, ensuring that tenants in both the private rented sector and social housing have confidence in renting. Complaints and disputes should be dealt with fairly and in a timely manner, and tenants will be compensated where due. The current mechanism for resolving disputes is seen to be confusing, complicated, and cumbersome. The Government is also looking to move the resolution of disputes away from the courts and hopes that these measures will achieve this.

The Government has announced that they will be introducing legislation in England to address the following:

  • All private landlords, including private providers of purpose-built student housing and park home site operators must belong to a redress scheme. Failure to belong to a redress scheme will result in a financial penalty of up to £5,000. These measures reflect the requirements introduced in 2014 for all letting and managing agents in England to become a member of a redress scheme.
  • A ‘New Homes Ombudsman’ for developers of new-builds. It is proposed that developers of new-builds will need to be members of this Ombudsman by 2021 if they wish to participate in the Government’s landmark Help to Buy scheme.
  • Establish a working group (to be known as the Redress Reform Working Group) to develop a ‘Housing Complaints Resolution Service’. This resolution service is intended to be a one-stop-shop for housing complaints. It is intended to be used by tenants and leaseholders (social and private rented sector) as well as purchasers of new-build homes and users of all residential property agents.
  • The working group is also to review the current standards of resolving disputes with a view to creating a single ‘Code of Practice’ on complaint handling across all tenures, to ensure consistency and to raise the standard of service consumers should expect when they seek help.

No date has been set for the introduction of the new rules, but the Government has said that they will bring forward legislation at the earliest possible opportunity (once parliamentary time allows).

Government Plans to Abolish s21 Eviction Procedure

bad news

The Government has outlined plans to consult on new legislation to abolish Section 21 evictions in England. Similar plans have also been announced for Wales.

Under the current law in England, landlords can evict tenants (giving them eight weeks’ notice) at any time after the fixed-term contract has come to an end, without specifying a reason. This procedure is known as a s21 eviction procedure and is often referred to as a ‘no-fault eviction’.

If this procedure is abolished, landlords would need to rely on the Section 8 eviction procedure (under which landlords need a legitimate reason) to seek possession of a property. This is seen by many as being a costly and lengthy procedure which can take an average of 22 weeks to resolve.

Along with the abolishment of the Section 21 eviction procedure, the Government has announced an intention to amend the Section 8 eviction procedure to allow for a landlord to regain possession of a property where they wish to sell it or move into it.

The Government has also promised extra resources and changes to the court process to ensure that cases are expedited and run smoothly through the courts.

The Government’s aim is to protect tenants; the official press release stated that the Section 21 eviction procedure is one of the biggest causes of family homelessness. With more than four million people in private rented accommodation, the Government argue that more needs to be done to ensure that tenants have greater certainty and security in the housing market.

There is concern that the Government’s proposals will result in renting being more expensive as landlords face increasingly costly eviction procedures, or as a result of a decrease in supply if landlords cease renting out their properties altogether. There is also speculation that landlords may prefer to rent out their properties as holiday lets.

No dates have yet been announced for the consultation. In the meantime, the current Section 21 procedure can still be used.

As a landlord, what impact would the abolishment of the Section 21 eviction procedure have on your business? Your comments are, as ever, welcome!

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