HMRC gunning for MDR Claimants, with new enquiry powers

HMRC have continued their SDLT winning streak in the Tax Tribunal, with another MDR Claimant suffering a heavy defeat for failing to meet the required thresholds to claim Multiple Dwellings Relief.

Whilst these cases are interesting to tax lawyers from a technical tax perspective, the judgments are also a cautionary tale to property lawyers and their clients.  Not least as they coincide with HMRC being granted a new power to investigate MDR claims in the recent Budget.

This article considers the risks to property lawyers and their clients of advancing MDR claims against the evolving SDLT case law and enhanced HMRC powers.

But first, let’s recap.  What is MDR and why does everyone want to claim it?

MDR is a relief available where under a single or linked purchase a buyer acquires an interest in at least two dwellings.

MDR is calculated by dividing the purchase price by the number of dwellings to produce an Average Dwelling Price (“ADP”), calculating the SDLT on the ADP and then multiplying the result by the number of dwellings.  .  MDR is always subject to a minimum rate of 1% of the purchase price and where it is relevant must include the SDLT surcharges for additional properties and non- resident purchasers.

That’s the easy bit, where it gets a bit trickier is working out what actually is a “dwelling” for the purpose of MDR

For the purposes of MDR, a building or part of a building counts as a dwelling if it is “used or is suitable for use as a single dwelling” at the “effective date[1]” of the transaction.

There is no statutory definition of what the term “suitable for use as a single dwelling” means.  The term is therefore open to its ordinary interpretation and is a source of some difficulty for taxpayers to determine.

HMRC updated their published guidance relating to the interpretation of when a building or part of a building would be treated as suitable for use as a single dwelling.  This guidance can be found at SDLTM00380 – SDLTM00430.

At SDLTM00410, HMRC state:

“The test of whether a property is “suitable for use” as a single dwelling is a more stringent test than whether it forms a self-contained part of a larger dwelling.  Furthermore, whether or not it is suitable for use as a single dwelling requires consideration of whether it is sufficiently independent to be considered a dwelling on its own.  In the case where a building is considered to contain more than one dwelling, evidence will be needed to show that each ‘dwelling’ in question is sufficiently independent to count as a separate dwelling in its own right.  In the absence of sufficient evidence, it may be decided that it is more appropriate to consider that there is one dwelling, not two or more.”

HMRC’s emphasis on ‘single’, ‘more than one’ and ‘separate’ dwelling is purposeful and driven by the high number of SDLT “specialists” who contact homebuyers claiming to be able to secure them a refund of SDLT based on a missed MDR claim.  Many of these claims have stretched the term to breaking point and HMRC are now routinely attacking claims for MDR and, as several tax tribunal cases have shown, being very successful in doing so.

Latest Cases – Wilkinson and Fiander

In the recent case of Wilkinson v HMRC [2020] heard on 8 February 2021 (the “Wilkinson Case”), the tribunal judge commented on the relevance of the use of “single” for MDR purposes stating that it means that the dwelling “should have coherence as one identifiable property”.  In expanding on this the judge went on to clarify that “The legislation is not restricted on its face to stand alone properties” but that the relevant dwelling “must be “self-sufficient, just as each individual flat in a block of flats would be “self-sufficient”.

When reviewing a claim for MDR, HMRC place emphasis on several factors including whether each dwelling at the property:

  • is separately registered for council tax;
  • is separately registered with the post office;
  • has its own independent access, security, and privacy;
  • has control over its own utility supplies;
  • has the usual features for a dwelling (cooking, bathing, sleeping, and living areas); and
  • whether the property was marketed as having a separate self-contained dwelling.

Let’s focus on a few of these points in turn.

Independence, security and privacy

The judge in the Wilkinson case, largely followed and expanded on the principles set out in an earlier case relating to a claim for MDR Fiander & Brower v HMRC [2020] (the “Fiander Case”).  The Fiander Case involved a main dwelling and an annexe.  Although the taxpayers claim for MDR failed in this case, this was because the annexe was separated from the main dwelling only by a corridor and with no door separating the two dwelling areas.  The tribunal judges therefore held that the annexe lacked the necessary independence and privacy to be treated as a separate dwelling in its own right.  In doing so, the judges considered all the factors relevant to deciding whether the annexe could be a separate dwelling and focussed on the physical attributes of the annexe at completion.

The judges agreed with HMRC that for the purposes of MDR each dwelling should “accommodate all of a person’s basic domestic living needs: to sleep, to eat, to attend to one’s personal hygiene, with a reasonable degree of privacy and security.” They also agreed with HMRC that the use of the word “single” in the legislation meant that the dwelling has to be “self-sufficient” and “stand- alone” going so far as to say that the use of the word “single” “excludes, in our view, use as a dwelling joined to another dwelling” However, in the Wilkinson Case the judge remarked that if you were to view this last phrase literally, neighbouring flats could not qualify as stand-alone dwellings, which could not be correct.  Accordingly, we are of the view that the conclusion in the Wilkinson Case is that what the tribunal meant by this is that you simply cannot have a separate dwelling where the occupants of a house and the occupants of an annexe can move freely between each other’s properties.

The judges in the Fiander Case therefore concluded that what “suitable for use as a dwelling” meant was that each dwelling had to have the physical characteristics of a dwelling and to be single, there must be a way that strangers could live in each dwelling with absolute privacy and security from each other.  The Wilkinson Case upheld this opinion.

Control over utilities

HMRC still place great significance on each dwelling having control of their own utilities, separate fuse boxes, water stopcocks, heating and boiler controls being matters that they specifically refer to in their guidance.  The judges in the Fiander Case however, deliberately stated that they placed no significance on these matters, nor the restrictive covenant restricting separate sale of the annexe.

The judge in the Wilkinson Case largely upheld this view, however she went a little further concluding that whilst separate meters, council tax and postal addresses had little impact, it was necessary that each dwelling could control their own heating and hot water settings.

Key requirements – cooking facilities

Of notable interest in the Wilkinson Case is also the test to adjudge the standard of kitchen facilities required for a single dwelling to be self-sufficient.  The judge noted that the standard could vary depending on the location of the property with town and city centre properties requiring less than more remote properties but the judge in the Wilkinson Case thought that suggesting that a walk-in wardrobe with nothing more than a plug was stretching the suitability of the annexe as a single dwelling, “if not beyond, to its reasonable limits.   Accordingly, the lack of a surface for food preparation and plumbing for a sink to be attached to a fresh water supply, was in the Wilkinson Case, a key reason for the claim for MDR in that case to be denied.

New HMRC powers

There seems to have developed, over the last few years, a “have a go” attitude, with many purchasers encouraged to file MDR claims that wouldn’t pass muster if assessed by the Tax Tribunal.  Some purchasers may think that this aggressive policy has served them well and their claim must have been justified. A lot of the SDLT reclaim companies submit little more than a short letter requesting an amendment to the original SDLT return on the basis of a missed claim for relief and HMRC, understaffed as they are, have a tendency to operate on a pay now check later basis. The initial repayment appears to be a success for the taxpayer but as we have seen in the tribunal cases HMRC will later check that the reclaim was indeed valid and in doing so have found how far reclaim companies are pushing the “reasonable limits” of when parts of a dwelling can be considered separate dwellings in their own right.

However, many MDR claims and reclaims are just  slipping through the net, on account of the volume of claims HMRC receive and their general power of enquiry being time limited to the 9 months following the filing date of the SDLT return.

This, however, is all set to change, with new powers being given to HMRC with effect from the date of Royal Assent of the current Finance Bill.  These new powers will enable HMRC to issue information requests (known as Schedule 36 Notices) to check that no “clawback event” have occurred. In doing so, HMRC will also be able to “discover” instances where the relief was not validly claimed or reclaimed in the first instance.

For MDR, there is a three-year clawback period, in which the relief can be withdrawn if any of the qualifying conditions fail to be met.  The practical effect of the new powers is that HMRC will be more able to use their discovery powers which allow them four years (six if they think the taxpayer’s filing position was careless) from the effective date of the transaction.  Whilst HMRC’s new powers mean that they will only be able to start issuing notices after the date of Royal Assent, there is no bar in them looking back into transactions which completed in the last three years.

Penalties for failed MDR claims

With HMRC ramping up their powers to attack MDR claims, it is not inconceivable that they will also start considering whether they can impose additional penalties on taxpayers for being careless or even deliberately misleading HMRC in the submission of their SDLT returns. Reliance on an agent is no defence.  In fact it is important for property lawyers submitting returns to HMRC on their clients’ behalf, to be aware that penalties can also be imposed on them as ‘agents’ if HMRC can substantiate careless behaviour. Blind reliance by a lawyer whose client has relied on the advice of another “specialist” who has not adequately “stressed tested” the basis of a claim for MDR against the decisions of the tribunals could end up coming back to haunt them.

Professional Negligence Claims

In another worrying development, reclaim companies are positioning themselves to start encouraging their clients to sue their property lawyers for these missed MDR claims. When HMRC initially pay a reclaim, it appears that that the property lawyer incorrectly advised their clients as to their SDLT liabilities.   However property lawyers should hold their resolve in such instances, for the following reasons:

  • just because HMRC have made an initial repayment to the client, does not mean that the claim will necessarily be justified or would succeed if tested properly; and
  • reclaim companies charge significant fees based on a percentage of the amount reclaimed. If this is being suggested as a basis of loss for the client, by using a reclaim company they have denied the opportunity for the property lawyer to rectify the situation either at no cost or a much lower cost to themselves.

Property Lawyer Takeaways

  • MDR claims are complex and highly fact specific to each case. All recent Tribunal decisions have gone in HMRC’s favour, against SDLT refund companies.
  • HMRC have new powers to look into and discover MDR claims which may have not been validly submitted.
  • The penalties to clients of failed claims can be very costly, as can attempting to pursue advisers’ “no win – no fee” promises when a claim is later denied.
  • You should not facilitate clients to make MDR claims or reclaims without a full and proper stress test of the facts of each case.
  • You should not advise on SDLT unless you are a qualified tax lawyer or tax professional and you should be comfortable that if you refer your client to external advisers that the advice received withstands scrutiny against relevant case law decisions.
  • You should recommend clients take objective tax law advice on the merits of any possible SDLT claim for MDR or otherwise, before they proceed.

For more information or to book an SDLT training session for your firm contact [email protected]


[1] The effective date of a transaction is usually completion, however that date can be triggered earlier if the contract to purchase the relevant dwelling is “substantially performed”.  Substantial performance can occur where after exchange of contracts, the purchaser either pays a substantial amount of the consideration payable under the contract or occupies the relevant property whether under a lease or licence or otherwise.  A substantial amount of the consideration is confirmed by HMRC as meaning at least 90% of the purchase price being paid.

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