Loophole spotted in rent-a-room legislation

The rent-a-room scheme introduced by the Government last April was intended to help owner-occupiers earn some tax- free income from letting spare rooms in their homes.

Apart from a simple declaration that the income does not exceed pounds 3,250, the Inland Revenue does not require any further information.

But sharp-eyed accountants think they have spotted a loophole in the 1992 Finance Act that apparently opens up the possibility for directors and self-employed people (in partnerships) to let rooms to themselves.

On the one hand they claim the rental as a tax-deductible expense for the business. On the other they receive the income tax-free as an individual.

The potential tax saving could be more than pounds 800 for a basic rate taxpayer and up to pounds 1,300 for those in the 40 per cent band.

The section of the 1992 Finance Act that sets out the rules for letting furnished accommodation (Schedule 10, Section 59) states: 'A residence is a qualifying residence if it is the individual's only or main residence at any time in any period which as regards the year of assessment is a basis period . . .'

Inland Revenue leaflet IR87 makes it clear that this covers not just people who own their homes but also people who rent them and wish to sub-let.

While the legislation defines owner-occupation, and clearly rules out houses and flats bought as investments, it does not mention the precise use to which the rooms have to be put by the tenant, who might be self-employed or working from home.

One Surrey chartered accountant who has circulated clients with details of the scheme said: 'The spirit of the legislation would appear to be to encourage people to let out part of their homes to those in difficulty housing themselves.

'However, there appears to be nothing to prevent a director or partner who works from home charging rent to his business which should qualify as a deduction.'

The initial reaction of the Inland Revenue is sceptical. A spokesman said he believed the Finance Act could be interpreted to mean that the tenant must also use a room mainly for residential purposes. He was aware that some accountants did not accept this argument and would be preparing accounts to include renting a room as an allowable expense.

Another accountant pointed out that it would be difficult for the Revenue to pick up, especially if the sum claimed was less than pounds 3,250, although one could not claim other expenses for use of the home as an office. So far as the individual's tax return is concerned, apart from ticking a box, there is no need to give any further details.

The accountant has told his clients: 'I imagine that as it is rather blatantly a misuse of the intention of the legislation, the opportunity could be removed in the next Finance Bill. However, you may wish to put an invoice through for incorporation into the next accounts.'