- Churchill Tax
Investigations – Rental Property Owners Under Attack
You’ve read worrying reports about checks being made by HMRC’s Property Income Task Force. While you own a rental property, it’s only made losses to date and so you haven’t declared it. Can HMRC penalise you?
New task forces
Over the last two years HMRC has launched over 30 task forces whose aim is to discover tax evasion in specific market sectors. In a style reminiscent of good-cop-bad-cop TV shows these task forces are empowered to offer sweeteners to encourage evaders to come clean before they collar them. These take the form of lower penalties than would be dished out if they catch the evaders before they own up. Interestingly, no such incentive is offered by those investigating the property rental sector.
Good informants
We think the lack of incentive is due to HMRC’s confidence that it has good information on defaulters. It’s long had powers that require letting agents to report details of those who they let property for. Since 2011 it’s had stronger data gathering rights and can, under threat of a £300 fine, ask almost anyone, e.g. a tenant, to provide information it believes might lead it to a tax evader.
Target area
The property rental task force is concentrating on landlords in East Anglia, London, Leeds, York, Leicester, Nottingham, Lincoln, Durham and Sunderland, but the odds are this will be expanded over the course of 2013. If, like many buy-to-let landlords, you make losses, do you need to come forward to avoid trouble with the Taxman?
Declaration requirements
If you’re required to complete and submit a self-assessment (SA) tax return for any reason, then you must declare your rental income and expenses in the property section whether or not you make a loss. However, where you aren’t required to submit an SA return, the position is different.
EXAMPLE:
A couple own a rental property jointly which has only made losses to date. One spouse is a taxpayer and so must report the rental income to HMRC, but the other is not. There’s no requirement for the non-taxpaying owner to report details of income or expenditure and they can’t be penalised for not doing so. Having said that, there are circumstances in which it’s advisable to report the figures, even on loss making properties.
Small losses
Where your income is fully taxed at source, you aren’t required to submit a tax return. But say you own a rental property that, according to your workings, makes a small loss each year. Without a return form HMRC can’t verify or challenge your workings. That might sound like a good thing, but imagine a few years down the line the property makes a profit; you declare this but knock off the previous losses. The Taxman can now challenge these. At best this might mean having to dig out old records, at worst he might find an error which turns a previous loss into a profit on which you’ll now have to pay tax, interest and possibly penalties.
TIP:
Unless you’re 100% sure of your figures, we advise you to register for SA even where you make losses. This gives you some protection from an investigation as HMRC only has one year from the normal SA return filing date to challenge your figures. Note. In the circumstances we’ve described, HMRC will be reluctant to put you into the SA system, but you can insist.
Conclusion
You don’t need to declare a rental business that makes only losses, and HMRC can’t penalise you. But if you already submit a self-assessment (SA) tax return, you must include the figures. However, unless you’re 100% sure of your figures, it’s a good idea to register for SA as this shortens HMRC’s investigation window.