New taskforce launches crackdown to recoup £550m ‘lost’ rental cash

Novice landlords who have been letting properties without declaring income are the target of the latest tax amnesty from HM Revenue & Customs.

A taskforce has been deployed to hunt buy-to-let landlords in the southeast England who are not reporting their rental income.

The clampdown will target “accidental landlords” – the growing number of homeowners who have been forced to let properties because they are unable to find buyers – as well as unscrupulous professionals who are cheating the taxman on a string of homes.

There are just under 260,000 accidental landlords in the UK, according to Rightmove, the property website – 14% of the 1.9m landlords in total.

HMRC collects £1.8 billion a year tax on rental income. Another £550m is lost because landlords knowingly or unknowingly avoid payment.

The taskforce has already targeted the private rented sector in London, East Anglia, Yorkshire, northwest England and north Wales and is looking into 1,200 cases. Other regional campaigns are likely to follow.

Many accidental landlords will not be aware that they have done something wrong, said Mike Warburton at Grant Thornton, the accountants. “If you are letting your home, you must declare the income on a self-assessment tax return, even if you do not make any profit after expenses. You should also keep all the paperwork because the taxman may ask you to justify the numbers.”

The taxman has launched various investigations in recent years to tackle avoidance and fraud. Doctors, plumbers, online traders, self-employed builders, electricians and restaurant owners have been targeted, and HMRC is on course to collect a total of £50m of unpaid tax for 2011-12.

What’s Happening

The new taskforce, announced this week, hopes to raise £4m from the rented property sector in southeast England. HMRC said it was putting “boots on the ground” in the region after its systems revealed evidence of serious non-payment. “The public expects us to chase people who are not paying tax, whether deliberately or accidentally, and that’s what we are doing. We are knocking on doors, writing letters and making phone calls.

Buy-to-let investors and accidental landlords may be surprised to discover how much information HMRC can get hold of.

Its connect computer system takes data from the internet and a series of databases, including the electoral roll, Land Registry and Companies House, and cross-checks it with HMRC’s self-assessment tax records.

If you have advertised for tenants online, Connect will know about it. If you have used a letting agency, HMRC will have the details.

What are the penalties?

Any landlord who has not paid the tax correctly should be prepared for a knock on the door, said HMRC. They will have to pay all the undeclared tax and a late-payment interest charge of 3%, even if they made a genuine mistake.

They may also face penalties rising to 100% of unpaid tax, although the average penalty is between 30% to 40%. Mike Down, partner at Baker Tilly, the accountant, said “if you’ve simply been careless in failing to declare the income, the penalty will typically range from 15% to 30%. You may not even have to pay a penalty at all.”

You will be treated more leniently if you approach HMRC first. “If you make a full voluntary disclosure and HMRC accepts you were merely careless, you will pay a much lower penalty” said Down. “HMRC wants to encourage people to come forward.”

You should declare any other unpaid tax at the same time, Down added. “You may have to sign a certificate of full disclosure. This isn’t something to be taken lightly, because a false statement may result in prosecution, but it’s highly unlikely that an accidental landlord will be prosecuted.”

Many people caught up in the swoop, particularly those who are taxed on PAYE, will never have received a self-assessment form, said Stuart Law, chief executive of Assetz, the property investment adviser. “It may seem unfair, but this isn’t a valid excuse for failing to declare all your rental income.”

Others will be genuinely aware that they had to pay tax, said a senior tax investigator at KinsellaTax.

“HMRC likes to use scare tactics to persuade people to come forward, but it doesn’t do enough to make people aware of what they need to report in the first place.

“If there are mitigating circumstances, such as a family illness, that prevented you from sorting out your tax affairs, you may find HMRC surprisingly sympathetic.”

To make a full voluntary disclosure, contact your local tax office or ask a specialist to act on your behalf.

How much will I have to pay?

Don’t panic if you have not declared rental income; you may owe less than you think.

Landlords pay income tax on profit only after expenses have been deducted, said Mark Harris of SPF Private Clients, the mortgage brokers.

“You can offset your mortgage interest payments against your rental income, although not the capital repayments. You can also claim tax relief for maintenance and repairs, household insurance, or for paying a managing agent to look after the property on your behalf.”

If letting a furnished property, you can claim 10% of the rental income as wear and tear. “If you aren’t sure how to work it all out, use an accountant to file your return. Their fee is also tax-deductable,” added Harris.

Landlords in the southeast are in the line of fire today, but it could be tomorrow, warned HMRC. “Landlords around the country should be approaching us now,” it said.”

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