We have seen a trend of HMRC opening a large number of enquiries into rental income and then trying to expand it to look at how the purchases were funded. Over the last month, we have been made aware of dozens of such cases.
Although HMRC is quite within their right to check returns of rental income for periods in date they cannot use these enquiries as fishing trips to get to look at earlier years. Their aim is to use this to assess taxpayers to additional mythical income which was earned to buy the properties. I have recently had a case where I successfully stopped such an assessment where HMRC was looking for an additional £400,000 of tax and interest!
If you get such an enquiry we would suggest that you do not provide them with anything as to how they property purchase was funded. This can lead to them having information which will extend their enquiries. We usually go back to say that we will not be providing this information as they are out of time to ask questions on this. They often follow up by saying that they have made a discovery. Again this is wrong. There is not a discovery if they are arguing that they have concerns that the income for say 2008/09 is too small for the taxpayer to fund a purchase. They would have had this information when the return was submitted and therefore should have raised this earlier.
We have also received S36 notices for this information. We have even had one where the Inspector said that he did not have to have a year open to enable him to issue such a notice. Clearly, they are looking to extend their enquiries where they should not and we all need to defend our clients against these attacks.
If you need help with this we are happy to discuss it with you.