How far back to declare underpayment of tax?

How far back to declare underpayment of tax?

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I am completing the tax return for two clients - a married couple - for the first time.  They have previously completed their own returns.

The couple own a number of properties jointly, and receive rental income from these. I have found that they have underpaid tax in previous tax years going back to 2001/2 because they have included capital repayments as well as interest as an expense to their rental income. They had not employed a tax adviser and genuinely had no idea that capital repayments were not allowable.

I am trying to ascertain how far back we need to declare the under-payment to HMRC. The agent helpline at HMRC (I asked the question as a general query rather than in relation to the specific client) said that it was all tax returns back to 2009/10, but surely the enquiry window for 2009/10 is now closed, and therefore we should declare the underpayment for 2010/11 and 2011/12 only. 

Confirmation would be appreciated.  I have not dealt with such a situation before and of course am keen to ensure that I do not advise the client to declare any more years' of underpayment than necessary.

Thank you.

Replies (5)

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By sparkler
25th Oct 2013 12:14

Anyone?

I hope my question wasn't confusing - but I am hoping someone might know how far back under-reported rental profit should be declared to HMRC!

As I mentioned in my question, HMRC told me that I should go back to the 09/10 tax return - but I thought that the enquiry window for 09/10 was now closed, so not sure why I would need to include that year.

If anyone knows the answer, that would be much appreciated.

 

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By User deleted
25th Oct 2013 12:34

Come clean

I would suggest you come clean, dealt with a new client last year who had rented out two properties for the same period without declaring the income.  Lady was in full time employment and knew nothing of self-assessment or the need to declare other earnings.  The penalty was reduced to 10% after haggling, and because client had volunteered all information ( I prepared and copied detailed schedules to HMRC). 

As your case is a genuine error, and a common one at that, I would have thought that HMRC would be happy to accept voluntary disclosure with no penalty, maybe just interest.

I should point out that, although the enquiry window is closed, HMRC can go back if they believe that any evasion or avoidance has taken place.

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Replying to chatman:
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By sparkler
25th Oct 2013 13:30

No intention not to come clean!

Mathswizard wrote:

I would suggest you come clean, dealt with a new client last year who had rented out two properties for the same period without declaring the income.  Lady was in full time employment and knew nothing of self-assessment or the need to declare other earnings.  The penalty was reduced to 10% after haggling, and because client had volunteered all information ( I prepared and copied detailed schedules to HMRC). 

As your case is a genuine error, and a common one at that, I would have thought that HMRC would be happy to accept voluntary disclosure with no penalty, maybe just interest.

I should point out that, although the enquiry window is closed, HMRC can go back if they believe that any evasion or avoidance has taken place.

Thank you for your reply. There is no doubt that the client intends to confess the error to HMRC - the query is over the time period that the under-declaration of tax should be reported.  

There is no question of tax evasion or avoidance - my clients were aghast when I informed them of their error, - but I would have thought that it would not be in the clients' best interests to report an underpayment of tax for 12 years (they have had the property since 2001) when HMRC themselves state that amendments to returns back to 09/10 are all that is required.

Do others agree, or would you report the 12 years of underpayments in any case and tell the client to pay up?

 

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By claire77
25th Oct 2013 12:54

What about 12 years of non-declaration?

Hi I have a client who has never declared income from two properties rented out for 12 years. I am currently assessing what the tax liability would have been before notifying HMRC. Surely I need to go right back to the first year they rented the properties out?

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By Peter007
13th Mar 2014 16:47

10 years no rent tax

Hi Sparker,

What happened finally with your client?

I am in the same position as you client. I did not declare rental income for 10 years... even worst the property is in capital repayment ! .. and on top of that I am in the 40% tax bracket.

I didn't know I had to pay anything since the mortgage payment and the rent were about the same. To my surprise I just found out that the tax office thinks differently.

 

Thanks

 

Peter

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