HMRC uncovered 11,129 cases where landlords had underpaid tax or not paid any tax on their rental income last year, a 27% increase from 8,704 the previous year.
While HMRC increasingly scrutinises the tax affairs of UK landlords, more and more are likely to face investigations.
As advisers will know, HMRC’s ‘Let Property’ campaign began in 2013 but has been ramped up in the last year. One of HMRC’s latest actions under this campaign was to send tens of thousands of “nudge” letters to landlords who it suspects of avoiding tax.
Nudge letters have been widely used by HMRC as part of its compliance activities in recent years and are designed to scare taxpayers into reviewing their affairs. Although intrusive for clients, these letters are seen by HMRC as a cost-effective way of reducing non-compliance.
It is easy to see why HMRC is concentrating its focus on landlords - HMRC collected £44.7m in extra tax through these investigations into landlords last year, up from £32.8m the year before. This success means HMRC is likely to push on with its campaign.
A key thing for accountants and their clients to be aware of is that if HMRC suspects a landlord has been deliberately avoiding tax, it has the power to reclaim 20 years’ worth of tax payments. HMRC can also impose fines up to the total value of any unpaid tax as well as the underpaid tax. HMRC collected £7.6m worth of fines from landlords last year.
However, if a landlord realises they have made a mistake and makes it known, HMRC will only reclaim tax payments going back six months. This highlights the importance of encouraging clients to regularly review their affairs and seeking your advice when they are unsure of anything.
The renewed focus on the tax affairs of landlords caps off a tough few years for landlords. There have been several tax changes since 2016, including increasing Stamp Duty Land Tax and cuts to tax relief on residential property which have added to the already complex set of rules these clients have to deal with.
As experienced advisers will know, HMRC has launched a wide range of campaigns against specific taxpayer groups, including campaigns against doctors, dentists and solicitors. Being aware of specific campaigns is important for understanding what HMRC’s next move will be.
Any mistakes made act as a warning to HMRC and could trigger investigations, which may result in penalties. Clients can protect themselves against the cost of most tax investigations by enlisting the services of PfP, call 0345 307 1177 or email firstname.lastname@example.org to find out more.