Landlords are the latest in HMRC’s spotlight, says Stephen Barratt. It is a campaign with a difference because it could strike at any moment…
The number of private residential landlords in the UK has more than doubled over the past decade to around 1.5m, renting out properties to more than 3.6m households.
HM Revenue and Customs believes that landlords are under-paying tax to the tune of £500m a year and is taking steps to recover what is due.
In September, HMRC launched what it calls its ‘Let Property Campaign’ giving buy-to-let, student and holiday home landlords that it believes are under-paying or deliberately not declaring rental income the opportunity to come clean and bring their tax affairs up to date. The campaign is expected to run for at least 18 months.
It will target a wide range of landlords, from professional landlords who make their living from property portfolios that may number many homes through to the ‘accidental landlord’ – those who perhaps have a second home following marriage, or occasionally rent out a holiday home to friends, or who are letting their former family home after they have moved to another part of the country due to their work.
The campaign builds on previous initiatives aimed at plumbers and electricians, building contractors, takeaway restaurants, motor traders, dentists and many other professions that have between them seen HMRC collect over £800m in unpaid tax.
Previous campaigns have typically been in two parts, the first being the period in which taxpayers can notify HMRC of their intention to take advantage of the disclosure opportunity, and the second being the actual disclosure itself.
But this campaign is different.
With this campaign, taxpayers are expected to be able to make a disclosure at any time during its duration. This is presumably to spread HMRC’s workload for what is a massive undertaking.
By way of background, HMRC is also using increasingly sophisticated software to identify those who are not paying sufficient tax, and the chances of going undetected are therefore diminishing. They do, however, recognise that there will be instances where individuals have either deliberately not declared rental income on let properties or made an honest mistake.
This distinction is important and will have a direct bearing on what penalty might be imposed.
This campaign offers landlords the opportunity to come forward voluntarily and pay any unpaid tax, interest and penalties at a preferential rate.
There are some golden rules determining best practice:
Always declare taxable rents to HMRC and settle the tax due on time to avoid interest and penalties.
Ensure that you maintain accurate records of income and expenditure that will bear HMRC scrutiny if they decide to inquire into the tax return.
Tax advisers will be able to give advice on what can and cannot be legitimately claimed to reduce the tax bill.
Take advice on the most taxefficient way of structuring the rental business, whether it be through sole or joint ownership, a partnership or a company. Good advice is essential because moving into a taxefficient structure might itself involve tax liabilities. Best practice is to consider the alternatives before the property is purchased so that it is tax-efficient from day one.
Do not ignore this campaign, and act as soon as possible. It may well be that HMRC is already aware of your financial details, and if HMRC makes the first move because no voluntary disclosure has been made, penalties can be expected to be more severe. Whilst the opportunity to make a disclosure might be available for 18 months, it is not clear whether or not the best outcome will be achieved if HMRC contacts the landlord; it is better to make a disclosure unprompted.
Do not to approach HMRC directly without first speaking with your accountant or tax adviser. HMRC is an increasingly tough negotiator and it is not its role to provide advice on an individual’s tax affairs. It is entirely possible that without a detailed knowledge of the tax system a larger tax bill and penalty than necessary may be charged.
If these rules are followed, then landlords can run their business safe in the knowledge that they are meeting their filing obligations whilst paying an acceptable rate of tax.
Stephen Barrratt is a director and tax specialist at accountants and business advisers James Cowper.
If you have any tax queries or concerns please visit landlord tax specialist Rita4Rent