HMRC CLOSING IN ON LANDLORDS

In a recent consultation paper HMRC described how it would like to widen its powers to collect information about landlords so that it can clamp down on undeclared income. This article gives an overview of the proposals and their consequences for landlords.

Are you properly declaring all your rental income as a landlord?

If you are not it would seem the chances are that HMRC will find out about it sooner or later.

HMRC published a consultation paper on 9th July 2009 which identifies underpayment of tax on lettings and undeclared capital gains on property as a particular problem. The Revenue views lettings as a lucrative area, not only for rental income, but for Capital Gains Tax when property is sold. They predict that there is millions of pounds of underpaid tax out there, and in this paper they consider how their investigatory and information gathering powers can be modernised and increased in order to clamp down on underpayment. The paper applies not only to large scale landlords but small scale buy-to-let landlords.

The consultation paper can be found on the HMRC website, and is entitled Bulk and Specialist Information Powers. Part of the report refers to the recent "Property Campaign" undertaken by the Revenue, and the fact that it has so far yielded more than £100m in extra tax for them. The successful outcome of the Property Campaign has triggered a recognition that their powers to gather information could be increased, in order to recover even more.

HMRC already has extensive powers to obtain information from letting and managing agents. They can compel letting agents to disclose details of landlords on their books for whom they collect rent.  Other means of investigating are by receiving mass information which they call "bulk information" from third parties. In the case of property this is information from the Land Registry. Investigators receive the information, which tells them which properties have been bought and sold and by whom, and from that investigators can identify where there is a risk of unpaid tax, and then contact the landlord directly in order to make further enquiries.  This can be done informally by means of a phone call, or more formally by writing to the landlord or even commencing a statutory inquiry. Investigators also sift through classified ads and check out postcards in shop windows. In addition they have a whistleblower hotline, reports the Times Online.

Under the current powers letting agents only have to disclose landlords details to HMRC where they are actually collecting rent for the landlord. If the powers are extended as proposed in the paper they would also be compelled to disclose details of landlords who paid the agency a fee simply to find a tenant for their property, even where the landlord is no longer on the agency's books.  HMRC estimates that this “let only” type of client is an estimated 10% of agencies' overall clients.

Clearly these proposals will impact upon agents if they are brought in. They may well have to improve their record keeping at increased time and expense.  HMRC does recognise the impact on the "data providers" and the report mentions the need to minimise the administrative burden on them.

The advice to landlords from Residential Landlord.co.uk and Money Marketing.co.uk who both reported on the consultation paper is that you should respond to any letter you receive from HMRC in connection with this rather than ignore it, as it is unlikely to go away until HMRC have cleared it up. Properly advised landlords should have nothing to fear, but if you are in any doubt you should declare any income at an early stage thereby avoiding penalties when HMRC catches up with you.

If you are being investigated and you have a mortgage on the property or properties that you let HMRC will probably want to check your rental income and expenses with the mortgage lender, so if your lender did not already know that the property is let you might encounter problems with your lender when they find out.

For now the proposals in the consultation paper have not been implemented, but it does appear as if the net is closing in. You should seek advice from a tax specialist as to which rental income is taxable, what expenses are allowable, and what schemes might be available in order to minimise your rental income.

Contact Duncan Rann, tax specialist at Sandersons Solicitors drann@sandersons.co.uk 

Tel:       01482 324662

Fax:      01482 223110

e-mail:  enquiries@sandersonssolicitors.co.uk

 Source: Humber Landlords Assocation Website, July 2009