Landlords: Bring Your Tax Affairs Up To Date!

Even with the best possible intentions, when running a business and leading a busy life it is easy to get behind with one’s tax affairs. It is also easy to make mistakes. HMRC run various campaign which encourage people to get their tax affairs up to date in return for more favourable settlement terms. The ‘let property campaign’ (LPC) is one such campaign.

The LPC is aimed at individual landlords letting out residential property in the UK or abroad. Landlords who have not told HMRC about all of their letting income can use the campaign to make a voluntary disclosure. Landlords who make a voluntary disclosure will be able to settle their affairs on better terms than those who wait until HMRC come to them.

The LPC is open to all residential landlords with undisclosed taxes. This may include:

Those who rent out their home while abroad may also be able to use the scheme.

Landlords letting non-residential property, such as offices and warehouses, are not able to use this campaign, but can still make a voluntary disclosure to HMRC of any undeclared income.

The LPC offers landlords the best terms available to get their tax affairs in order. To get the best deal on offer, landlords with undeclared income need to tell HMRC that they wish to take part in the LPC. The next stage is to tell HMRC about undeclared income and gains by making a full disclosure. Once a disclosure has been made the landlord has 90 days to pay what is owing. Landlords must also co-operate fully with HMRC to ensure that they receive the lowest possible penalties.

Unlike other campaigns, there is no disclosure window in which the disclosure must be made by a particular date, so landlords who feared they may have missed the boat can still come forward.

Landlords who delay coming forward will be charged higher penalties.

When making their disclosure, the landlord has the opportunity to tell how HMRC how much penalty they believe they should pay; but be warned, HMRC will not necessarily agree. The penalty that will ultimately be payable will depend on why the landlord failed to disclose the letting income to HMRC. Landlords who completed self-assessment returns but made a simple mistake will pay much lower penalties than those who deliberately failed to declare their income. In cases of simple mistakes, HMRC can only go back six years (even if the mistakes date back further); however, where fraud is suspected, the window is 20 years.

The first stage in the LPC is for the landlord or his or her agent to notify HMRC of the intention to make a disclosure under the campaign. This can be done either by filling in the notification form or by calling the Let Property Helpline on 0300 123 0998. At the notification stage it is not necessary to provide HMRC with details of the undeclared income and gains – this comes later. 

A landlord can notify, or the landlord’s tax adviser can notify on the landlord’s behalf. HMRC will notify the landlord or the agent of the unique disclosure reference number (DRN) and will also provide a payment reference number (PRN).

Once HMRC have been notified of the intention to make a disclosure under the campaign, the next stage is to make the disclosure. The disclosure must be made within 90 days of the date on which the notification acknowledgement is received. The DRN is needed when making the disclosure. 

The landlord or his tax adviser will need to calculate what is owed. To do this, it is necessary to take account of the undeclared rental income for each year. There is no need to include income that has already been included on a self-assessment tax return because the landlord will have paid tax on this. In working out what is owed, it is also necessary to take account of any allowable expenses, such as insurance, mortgage interest, repairs, administration expenses, agents’ fees, etc. It is important that these expenses are not overlooked as they will reduce the amount of tax that is due, which in turn will reduce the interest and penalties arising.

The tax that will be payable on the undisclosed rental income will depend on the landlord’s personal circumstances, on what other income he or she has and whether the personal allowance is available. For example, a landlord who has other income and who falls within the higher rate tax bracket will pay tax at 40% on the undisclosed rental income. The tax liability must be calculated separately for each tax year for which there are undisclosed liabilities. 

Once the tax liabilities have been calculated, the next stage is to work out the interest on the tax paid late and the penalties. Interest runs from the date on which the tax was due (i.e. 31 January after the end of the tax year to which it relates) until the date on which it was paid. The penalty will depend on the reason the income was not disclosed and whether disclosure was prompted by HMRC.

HMRC have a calculator which can be used to work out the interest and penalties due. It is available on the Gov.uk website at www.hmrc.gov.uk/gds/campaigns/19years-calc-stub.htm.

The calculations can be complicated and it is advisable to use a tax adviser to ensure that they are right and that the best possible deal in terms of penalties is obtained.

A disclosure is not needed for any year in which a loss was made. Losses can be carried forward and set against future profits from the same property rental business. 

A condition for taking part in the LPC is that the landlord tells HMRC about all undisclosed income and gains that they may have, not just undisclosed letting income. When making a disclosure, it must be a full disclosure. Check that nothing has been missed, such as VAT, inheritance tax, capital gains tax or tax on employment income. 

Once the landlord is satisfied that the declaration is complete, he or she must then complete the declaration. This is an important part of the disclosure and should be taken seriously.

Under the LPC, the landlord must make an offer for the full amount owed. The offer, together with HMRC’s acceptance letter, creates a legally binding contract between the landlord and HMRC. Letters of offer are included in the disclosure forms which the landlord or his or her agent must complete.

HMRC anticipate that they will accept the vast majority of disclosures made under the LPC. An acknowledgement will normally be sent within two weeks of receipt of the disclosure. HMRC will review the disclosure and if they decide to accept it, an acceptance letter will be sent. In some cases, they will undertake further enquiries. It is advisable to co-operate, as this will ensure the best possible outcome in terms of penalties.

There are certain disclosures HMRC cannot accept; for example, those that are materially incorrect or incomplete or where HMRC believes that the money that is the subject of the disclosure may be the proceeds from serious crime. Making a disclosure cannot guarantee immunity from prosecution.

Unless HMRC have granted additional time to pay, payment should be made within 90 days of the deadline given on the notification acknowledgement letter. The PRN should be quoted when making the payment.

Using the LPC is a good opportunity for landlords to bring their affairs up to date.