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Not declaring income from property

I found out this morning that the partner of one of my friends is receiving income from rental property and not declaring it. She is also employed.

When I asked her why she hadn't declaring it she said she "didn't need to" as she wasn't making a "profit". Her mortgage is £600pm (or there about) and rent received is £520. She therefore thinks that because her mortgage is more than the rent, that she is not making a profit. Her mortgage is a capital repayment mortgage and is NOT a buy to let product.

I tried my best to explain that the capital repayment element of her mortgage was not an allowable expense, but she was not prepared to listen. I also told her that she HAS to declare the income, and again she was not prepared to listen.

Maybe I wasn’t speaking in layman’s terms and she didn’t understand. How can I explain this in a more simple way?

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06th Mar 2012 11:06

All too common

... for clients to misunderstand mortgage loan repayments!

It might be that the interest element of the mortgage payments plus her other costs on the property - insurance, for example - still exceed her rental income, in which case she would have no need to notify chargeability or complete a tax return.  I assume that she is not already in self-assessment - if she is, she must disclose the rental income on her tax returns.

I am rather puzzled about your relationship with your friend's partner.  You seem to have been giving professional advice as an accountant to her as a client.  If so, you may need to consider a MLR report if she is indeed making a profit from the rental and refusing to disclose it.

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06th Mar 2012 11:28

She was quite clear that she meant the mortgage repayments rather than any other allowable expenses. I asked her how much she paid in insurance, agent’s fees, repairs etc and she said she had no idea as she did not keep records.

She most definitely is not a client of mine, and I would not take her on as a client. I always avoid mixing business and pleasure. I ended the conversation saying that she has to declare the income and if she needs help then she should seek professional advice from an accountant.

She said that in 2009 she received a letter from "someone" that said they had been notified that she was receiving income from property and she should complete a form stating profits, expenses, dates etc. Because she didn't think she made a "profit" she ignored it and threw the letter in the bin. Soon after she moved house.

I suspect that the letter was from HMRC and they have not caught up with here because she has not informed them of a change of address since 2009. If this is the case, then would she have to declare the income even if expenses were higher than income (I don’t think they are), because a SA would have already been issued?

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By neileg
06th Mar 2012 14:39

Keep in in proportion

It's bad enough coping with the financial misdeeds of our clients, so please don't think about taking on the rest of the world. You've probably gone further than I would have done giving sound advice but now you've got to call it a day. If you can't live with this then you might need some new friends.

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06th Mar 2012 14:34

As a last shot tell her about the new penalty regime  .

Also HMRC may have sent returns for completion to the old address so she has already incurred non filing penalties at least if not assessments

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By Flash Gordon
06th Mar 2012 14:59

Or you could...

report her to HMRC and give them her current address!

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13th Mar 2012 10:54

reporting someone

[quote=mattgriffiths]

http://www.hmrc.gov.uk/reportingfraud/online.htm

i would like to use this link every time someone on amazon sells me something without vat!

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07th Mar 2012 14:24

I've just almost fallen off my chair.....

Just heard from this woman who says that she has spoke to a solicitor, and the solicitor has told her that because the income from rental property is not her sole income (she also has employment), and because rent received has already been taxed from her tenants income, and because she doesn't make any profit (she thinks the capital repayment element of her mortgage is an allowable expense - i've told her otherwise but she won't listen), then she should not pay any tax at all.

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07th Mar 2012 15:01

lol

Do you believe her? If she telephoned you with a 'sneer' in her voice I would report her to SOCA, and then stand there laughing while she complains about the solicitor giving bad advice :)

If HMRC ask for info you are now going to get the blame, so you may as well have the pleasure as well as the pain, so get a report in. If HMRC don't follow up on your report at least you had the satisfaction of making sure you were not implicated, and you have done your duty.

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07th Mar 2012 15:02

Funny solicitor if they think that after taxed income used for paying rent is not taxable on the landlord. If that were to be true no consumer would pay VAT on purchases and the country would go bankrupt

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07th Mar 2012 15:22

I told her that if she wants to take that advice from the solicitor then she should ask him to put his advice in writing so she can hold him liable at a later date.

I've also told her not to speak to me about it again as I am not willing to explain any more tax rules to her.

I just keep shaking my head at this and thinking 'what the hell????'

The final word I said was that she should phone HMRC and ask them herself. She said she would. And I believe that she will.

The only advice that I have really given is to declare the income, go see an accountant if she feels she cannot do it alone, and speak to HMRC.

Do you think I should still file a report?

 

 

 

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07th Mar 2012 15:41

Not really!

Don't report. That comment was a bit naughty of me!

If she knows she is doing wrong, but does it anyway and refuses to put it right, then I would report, but it sounds like she genuinely believes she is right but hopefully she will check with HMRC and discover she is wrong. Then you may have to report her if she refuses to declare the income.

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07th Mar 2012 15:45

Not reportable

Unless I have misunderstood the position there is no suggestion of dishonesty here (the taxpayer believes she is doing the right thing).  That being so there is no criminal tax evasion and no money laundering.  So you have no suspicion to report.

David

(Shirley: you beat me to it!)

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07th Mar 2012 16:20

I think you have done all you can, I think she should be declaring the income on a return even if it just to record the loss for potential use in the future. 

On the other side has she ever lived in the property and would be claiming PPR on the eventual sale? if so if she never registers that the property has been let then if she claimed letting relief she'd be opening a bag of worms.  If she didnt claim letting relief she'd pay more CGT! That said if she refuses to declare the income then is she really like to report a disposal for CGT?

Whilst it does not look like HMRC are losing out on tax (assuming a loss is genuinely being made) all we know is that income is not being reported to HMRC that should be.  That to me requires a ML report to be made.  A ML report only has to be a suspicion it doesnt require hard proof. It is not our job to investigate, prove and convict.  We merely have to report suspicions.  That said if she isnt a client of yours I dont believe you could be done for not reporting her but I may be wrong.

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07th Mar 2012 16:28

No, she has never lived in the property. Should she still register?

And there is no loss, but a profit. The rental income is higher than allowable expenses. She is genuine in that she thought the capital repayment element of her mortage was an allowable expense.

 

 

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By ACDWebb
07th Mar 2012 18:02

I trust that

you will be dealing with all the legals & conveyancing when she comes to sell ;)

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08th Mar 2012 16:38

Well if she hasnt lived in the property she wont get PPR or Letting relief.  That said if she sells it will she be likely to report that and therefore pay any CGT on the gain? If she does sell the property and declare it you'd expect the Revenue to question how she is selling a property that she hasnt lived in and there is no record of her renting one (on the basis she hasnt declared it to them). To be honest I think she is running a high risk but thats up to her.  You've told her she should inform HMRC and file a return so your covered in that respect.

Perhaps somebody who is hotter on the ML laws can advise if it is definitely reportable.  I think it is because whilst she isn't a client, she is known to you, you have more than a suspicion she isnt reporting taxable income and that is a crime. I think as an accountant you have a duty to report but I am not 100%.

 

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08th Mar 2012 16:42

Not reportable

It is not reportable because she is not being dishonest - she genuinely believes she has no tax to pay (just like Mr Rednapp).

David

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09th Mar 2012 16:43

Hi David

So its not reportable on the basis she isnt deliberately evading tax because she doesnt think she owes any... not the strongest argument but given the 'SELF-ASSESSMENT' system a reasonable one! but is it not reportable on the basis that we suspect tax is due to HMRC on the profits and hasnt been paid. I dont claim to be an expect on ML laws, far far from it but shd we only report clients who we think are deliberately evading tax? In this case she has been advised differently and still doesnt think she owes any fair enough not suggesting she should be convicted of tax evasion but if we know tax is owed and therefore HMRC are losing out surely we shd report even if its genuine error and not deliberate.

If say I have an actual client in this situation, I advise them they are making rental profits, they disagree with me and say you are wrong am I them not required to report purely because they genuinely think I am wrong? Just asking as I would be surprised if thats the case.

 

Jon

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09th Mar 2012 18:35

When to report

You are correct that a report is (normally) required when someone is deliberately evading tax.  (There are exceptions but they are not relevant in this case.)

The point is that (apart from terrorism related suspicions) a report is only required (in England & Wales) where you suspect 'money laundering'.

In order to be money laundering there has to be two things.  Firstly a crime must have been committed (by someone - not necessarily the money launderer) from which a benefit (money, or an asset, or a liability side-stepped) must have been derived.  Secondly the suspected money launderer must have some involvement with that benefit and the launderer must know, or at least suspect, it to be a benefit of crime.

The crime of tax evasion necessarily involves dishonesty.  That necessarily involves an awareness on the part of the evader that he / she is doing wrong (either by an act - such as entering a false figure on a tax return - or by an omission - such as failing to declare chargeability to tax).

In this case the lady apparently has no awareness of her wrongdoing.  So she would not be guilty of tax evasion.

As there is no crime there can be no money laundering.

So there is no suspicion of money laundering which would trigger an obligation to report.

(But I agree HMRC is losing tax.  If they find out they are entitled to that tax, plus interest, plus a penalty for negligence.  However it would still be the case that a money laundering report would not be required.)

David

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12th Mar 2012 09:14

Hi David

Thanks for that, most interesting. I guess everybody just has to insist that they didnt think they was doing anything wrong and simply never admit to any deliberate wrong doing!

 

Jon

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12th Mar 2012 09:52

It's not that simple

HMRC will apply the tenet of "reasonableness" to this i.e. would claim you knew or ought to have known that you were liable for tax

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By neileg
13th Mar 2012 09:37

Don't forget

Whether this is a money laundering situation or not, there's still interest and penalties on the late paid tax. Pleading ignorance is no defence there, is it?

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13th Mar 2012 10:02

Pleading ignorance

As others have said, even if there is no crime (and hence no need for a money laundering suspicion report) there is still tax, interest and penalties.

Also in a criminal case magistrates / juries can (and do) infer what the defendant was thinking / realised / knew from his / her actions.

So if I were, say, to attempt to conceal money I had in a foreign bank account by putting the account in the name of my dog then a jury might reasonably conclude that I realised that I was doing wrong and so find me dishonest and guilty of tax evasion.  Or, of course, they may accept that I am so attached to my dog that I just thought it would be an innocent piece of fun to put the account in the dog's name.

My point is that in a criminal case (or suspected criminal case) it is not the end of the story if the defendant / client says "I didn't think I was doing anything wrong".

In terms of MLR reports you are obliged to do a bit of mind reading - or at least to form an opinion as to whether you suspect the person of dishonesty.

David

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13th Mar 2012 10:52

not a client

its a shame to say someone like the self employed partner of one of your freinds is unlikely to be a client so maybe she didnt welcome your advice/enlightenment on this area

 

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