The reasons for someone not being accurate about their tax affairs are varied. A common source of omitted taxable income is property rental and my blog will concentrate on this. People regularly explain to me that they didn’t feel they were making any profit from their rental property or properties because everything they received went into paying the mortgage and the managing agent fees. One client was painfully honest in admitting that he didn’t have the money to pay the tax in the early years and chose not to tell HMRC. The trouble was that as the years went by, and the pressure to do something became more acute as a result of HMRC’s increased compliance activities, he just didn’t know what to do or how to come clean. “I honestly haven’t slept in the last two years” he told me.
So what are the consequences? I regularly explain to clients that dealing with HMRC is, for the most part, a bit like riding the Ghost Train at the local fair, especially if you’re a bit nervous. It’s something you don’t look forward to, and rest assured there are bound to be a few jumpy moments along the way, but you’ll get to the end without any bumps and bruises and the sense of relief will be overwhelming.
There are four practical stages for dealing with disclosures and getting straight with HMRC:
- Find the accountant who best suits you and gives you confidence. Ideally they should have experience in dealing with HMRC disclosures and should have a good knowledge of preparing income and expenditure accounts and knowing what expenditure is allowable for tax each year. You are making a disclosure of omitted income, but neither you or your accountant should forget that there may be allowable expenses which can reduce your taxable income and the amount that will eventually be paid to HMRC. The accountant should also be completely familiar with HMRC’s penalty regime as the disclosures require the taxpayer to self-assess the penalty chargeable with appropriate reasons.
- After finding the right accountant and agreeing terms, it will be down to you to start work trying to identify the rental income received each tax year. This can be obtained from tenancy agreements, bank statements or statements from your managing agent if you have one. In some cases it might require reasonable estimates to be made. You should also start thinking about what expenses can be claimed against the rental income such as repairs to the property, managing agent’s fees, loan interest, utility payments, safety certificates and mileage costs for business journeys. It is also possible for some of your accountancy fees to be treated as relating to the preparation of rental accounts, which will be allowable for tax purposes. Was the property ever furnished? Can you claim Wear & Tear allowance in any of the tax years up to 2015/16? Your accountant will be able to advise on this and will make sure that you have claimed for everything you are entitled to.
- By this stage, your accountant will have registered you for the HMRC Let Property Campaign and you will have three months to finalise the figures and complete the disclosure. As soon as you have the information together, or as much as you can find, your accountant will start work preparing the rental income schedules based on what you have provided. He or she will run through everything with you to make sure that any estimates are reasonable, and to make sure you have claimed for all allowable expenses. The agent will need to establish the level of your taxable income in each of the years for which a disclosure is being made so that the income can be taxed at the correct rate. The agent can then prepare the outline disclosure, to include a calculation of late payment interest and a penalty which is dependent on the circumstances behind the tax failure and advise you of what you will need to pay. HMRC will normally expect a taxpayer to pay the settlement figure soon after the disclosure is made although we have, on occasions, managed to secure a time to pay agreement with HMRC
- Going forward, lest we not forget, that if you still have rental income then you will need to complete a tax return each year. This is something that you might wish to do yourself, or you can ask your accountant for a yearly quote for doing this.
It goes without saying that I would be more than happy to discuss the HMRC Let Property Campaign with anyone who wants to get in touch with me. We have dealt with numerous disclosures and have a 100% success rate with HMRC. If you are seriously thinking about bringing your tax affairs up to date, or if you have had a letter from HMRC inviting you to make a disclosure, then please get in touch. Surely you owe yourself a few sleep filled nights.
Neill Staff is our specialist tax partner and HMRC Let Property Campaign expert. Contact him at firstname.lastname@example.org or call him on 020 8418 2671. You can also follow him on LinkedIn.
For more on The Let Property Campaign, see: