Tax on property rental

[RichardHenshall]

I think you have missed the point of registering your villa as a business !

No I haven't. The point is to reduce the tax paid. I thought we were debating whether there is actually the real benefit that there appears to be at first glance. However, once it's a business, other rules will come into play.

My last comments relate to the treatment of IVA. You can only reclaim IVA that has actually been paid, is properly documented and is allowable. The simplified regime applies to IRS, not to IVA.

Clearly paying IRS on 20% of rental income (whether at 25% or 28%) is attractive compared to paying 28% IRS on most of your rental income, since so many expenses are disallowed when declaring on Anexo F. However other unintended costs, such as IVA, Segurança Social (I don't think I would be exempt), fiscal representation and accountancy fees etc., might reduce the appeal.

I find it interesting that this regime wasn't so obviously promoted when IRS on Anexo F income was only 15% a few years ago.

[widge]

I have decided to register as a business & apply for backdating to Jan 2013 incurring a fine for late application. However the financial advantages accruing to me make the fine & additional accounting costs a worthwhile expense enabling me to significantly reduce the amount of tax payable on the rental income.
I came to this conclusion in discussion with my agent and fiscal rep & having worked through the alternative tax regime administering my property as a private individual. I'm sure that everyone's circumstances are different and you should seek professional advice before deciding.

There are 600 cases under review at Lagoa's Financas & that's just for those individuals who have made a return for 2012. Those who haven't yet are subject to separate scrutiny & potentially greater fines.

[brian m]

hi I have been following this post with interest as I have within the last month been informed that my affairs are under review by the Portuguese tax authorities.My villa is registered and has the necessary tourist license and I have ALWAYS paid my tax in Portugal based on the rental income minus expenses and then taxed accordingly-not been an issue for 6 years. I have then produced a set of accounts in the UK and paid the tax on the profit but offset the taxed paid under the double tax rules. Simple and straight forward.
I too need to decide whether to become a "business" under the" simplified regime" and use the 80/20 split but have to consider the (vat) IVA issue particularly the need to charge 6%on lettings, and the additional accountancy expenses which are a concern, all has been extremely well explained in earlier posts. Also if I back date I will have to pay a fine as per the previous post.
The reason why I am under review appears to be because of claiming for some expenses( 2012) which are no longer allowable such as cleaners, electric, laundry, and many other expenses, that are allowable in the UK but not Portugal. Perhaps the simplest way to look at this is to control the income/rent.?
Can some one tell me that if I switch to the simplified regime can I still offset the tax paid in Portugal against the tax paid in the UK under the dual taxation treaty? I know I can under the current system, as I do it now. But I am a little worried to see if it can be done under the "simplified regime".?

[Sheila]

By 'registering as a business' do you mean applying for a letting licence? Or is there some other process you have to follow?
Is an accountant also a condition of being a business? If the tax calculations are simplified is it not possible to do it yourself? I believe you can do it online.

[brian m]

the license to let i think is called Alojamento Local( AL)is nothing to do with registering as a business,having said that an AL is required anyway.
the choice some of us have to make is to decide the most tax efficient method of paying the portuguses tax authorities;either register as a business and deduct 80% from your rental income leaving 20% and pay tax at 25% on this figure this is called the simplified tax regime.however if you opt for this scheme you have to pay some social security amount plus you need to submit invoices and pay and reclaim the VAT (iva).i dare say it can be done on line on without an accountant.however in my situation I would have to pay an accountant to look after my affairs,
the 2nd otion is as I currently am,to submit the accounts ON A PERSONAL BASIS (I use an accountant) each year based on the rental income minus ACCEPTABLE EXPENSES. this is the problem that I have come up against in that expenses such as electric,cleaners,gardners pool,laundry infact most things you would expect to be allowed are not.however they are allowed in the UK.
it may well be easier to leave things as they are and not register under the simplified tax regime as a business,but its a choice to be made based on own circumstances,as for me I am now highly likely to opt for the business option and employ an accountant.
if you register as a business i would presume you go to the local tax officer and register?but i am pretty sure you would have to do a vat return each quater which i am sure is not too difficult,but i dont know.my accountant is wanting around 450 euros plus tax a year.

[joeysoap]

But if you are liable for tax in UK would it make much difference if you pay more tax in Portugal and thus reduce your UK liability . Not familiar with UK tax bands but the top rate in Ireland is effectively 52%, and it doesn't take a lot of income to hit that rate. (41% tax, 7% social charge and 4% PRSI (social security - payable on unearned income if that income exceeds €3,000 pa) Any tax paid in Portgal can be offset against the 41% tax. So in most cases it would not really matter where you paid the tax, the result would be depressingly similar.

[sunman]

the license to let i think is called Alojamento Local( AL)is nothing to do with registering as a business,having said that an AL is required anyway.
the choice some of us have to make is to decide the most tax efficient method of paying the portuguses tax authorities;either register as a business and deduct 80% from your rental income leaving 20% and pay tax at 25% on this figure this is called the simplified tax regime.however if you opt for this scheme you have to pay some social security amount plus you need to submit invoices and pay and reclaim the VAT (iva).i dare say it can be done on line on without an accountant.however in my situation I would have to pay an accountant to look after my affairs,
the 2nd otion is as I currently am,to submit the accounts ON A PERSONAL BASIS (I use an accountant) each year based on the rental income minus ACCEPTABLE EXPENSES. this is the problem that I have come up against in that expenses such as electric,cleaners,gardners pool,laundry infact most things you would expect to be allowed are not.however they are allowed in the UK.
it may well be easier to leave things as they are and not register under the simplified tax regime as a business,but its a choice to be made based on own circumstances,as for me I am now highly likely to opt for the business option and employ an accountant.
if you register as a business i would presume you go to the local tax officer and register?but i am pretty sure you would have to do a vat return each quater which i am sure is not too difficult,but i dont know.my accountant is wanting around 450 euros plus tax a year.

my experience with dabbling in a few businesses in Portugal is that somewhere in a council office is a little piece of white paper detailing what you need and what you don't. I've been in lawyers meetings listening to the 'the Camera won't let us do this, & the Camera have stopped us doing that' as if the person has some special relationship with legal decision makers which is why you need to pay his fees & hang on a piece of string week after week.

I'm intrigued to read your list of 'non-allowed expenses' & am struggling to wonder what IS allowed?

Has anyone been to a tax office and asked for the printed guidelines to renting out a property?

[brian m]

I agree joeysoap the double taxation rules should allow to offset tax paid in portugal against tax paid in the UK so in theory no difference.
I am waiting for an answer from an accountantant to confirm as i am slightly worried that if registering as a" business "there is not an option to offset.I know you can on a personal basis hence in my first post I posed the question "if any one knew you can offset tax paid on a"business" ?
RE sunmans query,all i know is the allowable expenses have been reduced and do not include the things that you would have expected.i have asked for a list but as yet nothing has arrived.

[widge]

Has anyone been to a tax office and asked for the printed guidelines to renting out a property?

Presently awaiting a response from Lisbon.

The local people seem genuinely amazed that the authorities chose to reform the taxation in this way. They had expected all "AL" registered properties to be taxed as holiday lets allowing the normal maintenance costs to be deducted as expensed by the owner. Instead they seem to be following a model designed more for the "landlord & tenant" where the tenant pays for gas, electricity, water, rates etc.

[sunman]

Has anyone been to a tax office and asked for the printed guidelines to renting out a property?

Presently awaiting a response from Lisbon.

The local people seem genuinely amazed that the authorities chose to reform the taxation in this way. They had expected all "AL" registered properties to be taxed as holiday lets allowing the normal maintenance costs to be deducted as expensed by the owner. Instead they seem to be following a model designed more for the "landlord & tenant" where the tenant pays for gas, electricity, water, rates etc.

I've come across this Widge, 'landlord & tenant' agreements are applied in normal letting cases where the 'let agreement' is 'not for profit', you basically have a house sitter who pays the utility bills; so it sounds very odd to be applying this in the holiday let business?

- actually, now I remember, landlord & tenant agreements are normally applied to short term lets, and I suppose you can't get shorter term than a week's holiday, so that's why they might have applied it.

[widge]

I am waiting for an answer from an accountantant to confirm as i am slightly worried that if registering as a" business "there is not an option to offset.I know you can on a personal basis hence in my first post I posed the question "if any one knew you can offset tax paid on a"business" ?

As your tax return in the UK is for "Self" Assessment I think it follows that if you declare tax in Portugal as a business you wouldn't include it in your personal "Self" Assessment in the UK. As a business any rental income accrues to the business not you personally so it can't form part of your worldwide income for UK tax purposes.

Found this advice on the net which seems to back up my theory……………

"An alternative is to register your rental activity as a business under the ‘simplified regime’. This regime allows you to deduct 80% of gross income as operating expenses without having to proof (invoices) these expenses. The balance is taxable at 25%, effectively reducing your overall tax rate to 5% of gross rental income. Your tax assessment in Portugal is final, according to double taxation treaties throughout the European Union. In other words, you do not have to report this income again in our tax filing in your home country.

In addition to registering your activity with the Portuguese tax authority, online or at your local tax office, you must also register at the local social security department. All businesses have to pay social security. However, you only start to contribute from the 1st month of the second year of operation. Also, as you are most likely already registered and paying social security back home you are exempt. All businesses are required to issue invoices, which is done electronically via the internet and reported to the tax authorities."

[EMM]

As expected Widge provides a well informed response to the many questions regarding this subject.
However I would ask for clarification on the subject of social security payments.
Yes they are a payable from the start of year 2.
They are payable , the figure is well over E200month whether you make any income or not. at the end of the year they can be reassesed based on your tax return.
I believe that they are payable even if you pay in the UK as they relate to the Portuguese benefits system and have nothing to do with the UK. Clarification of this would be very usefull.

[widge]

Working on it EMM will update if & when I know more.

Of course you must understand that if what I wrote on this forum were 100% accurate I would be charging for advice given! Regrettably I am just another property owner trying to do the right thing & it's not easy or cheap to stay on the right side of the Portuguese & UK tax people. Having said that it's better than the alternative!

[RichardHenshall]

As your tax return in the UK is for "Self" Assessment I think it follows that if you declare tax in Portugal as a business you wouldn't include it in your personal "Self" Assessment in the UK. As a business any rental income accrues to the business not you personally so it can't form part of your worldwide income for UK tax purposes. ...

I found this, which, I think, casts doubt on this line of thinking:

HMRC also uses the term 'Corporation Tax Self Assessment'. This simply means that it's up to you (rather than HMRC) to work out how much Corporation Tax your company or organisation must pay for each Corporation Tax accounting period. In other words you 'self assess' your own Corporation Tax. You do this by filing your Company Tax Return to HMRC.

Corporation Tax Self Assessment for limited companies and organisations is a different tax from Self Assessment for individuals, self-employed, sole traders or partners. One common feature is that you self assess your liability for the tax.

Note how HMRC groups 'individuals, self-employed, sole traders or partners'.

I'm not yet convinced that the registered Portuguese 'activity' is a legal entity as such and therefore only liable to tax in Portugal. I could see that it would be if it was a limited company or equivalent but isn't this registered 'activity' more similar to being a self-employed, a sole-trader or in a partnership? Even if it is a legal entity, when it 'distributes' profit to it's proprietors (who may be subject to UK tax on their worldwide income) then surely that distribution (cf. dividend) will be subject to UK tax?

[shanagarry]

Why do you bother - it it really worth the effort

I know the fiscal world has changed and governments are finding more ways to part us from our hard earned money - but this topic highlights (to me) the 'tip-of-the-iceberg' as governments continually look for 'easy' revenue targets. When we rented our properties over a 15 year period - the effort to manage them was time consuming enough - now you have this additional cumbersome bureaucratic process which appears to be even more demanding and will undoubtedly intensify in the future. Reading this as well as postings on other forums has sadly put the kibosh on our re-entry to the Portuguese property market. For the foreseeable future - we'll rent and let somebody else 'enjoy the pleasure' of ownership.

I sincerely hope the return on all your investments exceeds the cost of this excessive bureaucratic liability