Hi all,
a friend of a client is thinking about owning up to untaxed rental income (yes it is a friend not the client),
With HMRC sending out letters to landlords to confirm their tax position, I wondered how draconian HMRC will be if this person owns up now rather than let the find out the hard way ans possibly face tougher penalties.
Has anyone had a client own up to undeclared rental income?, and if so, how do they treat that person and how far back does the tax man go in order to get the tax.
Regards
Tone
Replies (35)
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Use the Let Property campaign (Dec 13). I submitted one in April. Still waiting to hear from HMRC
The penalty will be less
He will owe interest, in any event.The penalty will be less. The penalty and letter or interview process etc. will be much better if he declares [and pays] to HMRC, in one fell swoop.The correspondence with HMRC is not difficult, if you are in control of the case.The penalty is worse, the longer it has gone on. He or she will need to own up to the first profitable year of let property income after deducting mortgage interest, insurance, repairs and maintenance, telephone costs, etc.HMRC may want to know where the let property [the funds to acquire the let property in the first place] monies initially came from.
Tax (and penalty & interest)
Tax (and penalty & interest) is based on PROFIT not Income.
Have you established the amount of tax due yet?
If they are 'thinking' about declaring, I'd also consider your position with regards to making a report.
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I would disagree that the let property campaign is not always the best route. We do lots of these and I tend to write in and get a nil penalty, just interest. Quicker to do too.
The best option depends on the quantum of the tax due. For small sums, letter. Big ones use the campaign.
HMRC normally just say "thank-you very much" and compute the tax due.
As opposed to when you get caught and its a lot more hassle.
If he has failed to notify chargeability or ignored the source deliberately, then HMRC can go back 20 years.
If there is no failure to notify chargeability ( because he is already submitting an SA return but has left the rental income off it ), then if the error is careless but not deliberate then HMRC can go back six years.
If he genuinely thought there was a deficit when there was a surplus, then he might be able to argue for six years. But generally, such a lengthy failure is going to end up under the 20 year category.
A disclosure of six years when twenty is blatantly appropriate is likely to adversely impact on penalty mitigation.
If your client owns up now, he will get a much lower penalty than if he makes a prompted disclosure.
One other advantage of the Let Property Campaign that's rarely mentioned is the fact that you don't have to do a tax return for each individual year. It can all go on one form, although of course it is still necessary to work out rental profits for each tax year.
This should keep accountancy fees down, which would be substantial for 10 years.
10 years, pah ...
One other advantage of the Let Property Campaign that's rarely mentioned is the fact that you don't have to do a tax return for each individual year. It can all go on one form, although of course it is still necessary to work out rental profits for each tax year.
This should keep accountancy fees down, which would be substantial for 10 years.
... that's nothing, I have just been appointed for one going back 20 years :o).
If they have rented via an agent it is not that onerous if they have retained the monthly statements.
5 years of tax returns
6 months ago I took on a client who, apart from her new business, revealed that she had never submitted a tax return and had 5 years worth of undeclared rental income. I told her that I didn't know what HMRC reaction would be but it was definitely better to get in there first before they found her.
After a few deep breaths I submitted 5 years of tax returns. End result ................. no penalties. I think that HMRC generally are wanting taxpayers to voluntarily declare their income and are taking big steps to be generous in not handing out big fines.
Ironically my previously high earning employee had made big contributions to a pension scheme a few years back. She had received basic rate relief but never received the benefit of tax relief at the higher rate. So, as a result of submitting those tax returns, my client went from a petrified mess to a loyal client some £7,000 better off.
Happy days
Please consider a letter such as
"To HMRC.
Client Name & NIC
Our client wishes to voluntary disclose income she has received from property or/and....
We are obtaining full details which will be sent to you in due course."
I understand this will prevent a discovery assessment and will give you time to prepare documents calculations etc.
Whether the Let Property Campaign offer of a one return will reduce Accountancy fees - I am doubtful since most of the work is not in preparing the tax returns.
Helpful HMRC?
Client has a rental income source that had not been previously reported on his returns. Had made both losses and profits in earlier years, so I did what other have suggested, and wrote to HMRC providing a summary of the figures and the anticipated net tax due (about £1,500).
HMRC eventually passed the information on to the Let Property Campaign off their own backs, who then agreed no penalties and nominal interest, so got a good result overall!
It's a balance ...
... it is generally easy work, you could do ten years in a couple of hours if you have all the lettings/mortgage statements, so you find the right fee that makes it worth your while but doesn't scare them off. I could quote 10 years @ £200 a year and see them go to the firm down the road, or quote them £1000 all in and make double my usual hourly return.
I would however ensure they are aware going forwards it will be £200 a time.
ok so details of recent correspondence
HMRC to Potential Client "You have not told us about a property"
Potential Client "Ooops, I have appointed *** accountants to sort this mess out and her are the details of the property income".
HMRC to us "Thanks for the property rental information, but that is not the property we knew about"
Us to client "Tell us EVERYTHING!"
Client to us "How did they find out about that?!"
Us to HMRC " Here is all information and cheque for interest and penalties, hope that's ok and client is very very sorry"
HMRC to client " Here have a serious defaulters notification, we will be watching you over the next five years and scrutinise all your tax affairs and may just turn up on the doorstep at anytime"
Client to us "Appeal against it!"
Us to client "Apparently you have no right of appeal..."
This would be funny ...
HMRC to Potential Client "You have not told us about a property"
Potential Client "Ooops, I have appointed *** accountants to sort this mess out and her are the details of the property income".
HMRC to us "Thanks for the property rental information, but that is not the property we knew about"
Us to client "Tell us EVERYTHING!"
Client to us "How did they find out about that?!"
Us to HMRC " Here is all information and cheque for interest and penalties, hope that's ok and client is very very sorry"
HMRC to client " Here have a serious defaulters notification, we will be watching you over the next five years and scrutinise all your tax affairs and may just turn up on the doorstep at anytime"
Client to us "Appeal against it!"
Us to client "Apparently you have no right of appeal..."
.... if it were not so frequently true - lol
A similar thread could go
Client to us - Those nasty HMRC are chasing us for tax on property income, but we have always made a loss
Us to client - we have prepared schedules for the 10 years, although the rent was £1000pm and the mortgage £1200, only £300 was interest so you actuallly made quite a nice profit!
Client to us - that can't be right, you mean I can't get relief on my mortgage capital repayments
Us to client - nope
And if I were Aesop, the moral is, get advice as soon as possible from a suitably competent accountant if you have anything other than salary or savings income, and certainly don't heed any exhortations by male persons within licensed retailing premises where said establishments purvey beverages in a social environment.
and then - part 2
we had a drive by who popped in for a chat, he had been recommended by a friend in Australia to speak to me because i got him out of a fix some years ago - news to me but there you go!
Me to client " So how far back are we going?"
Client "Not that long, probably about 15 years"
Books arrive going back to 1986, i say books but what i mean is a box of stuff with a completion statement for (you've guessed it) a property he failed to include in his initial list of 10 properties.
We hacked our way through it, worked out the tax, interest and penalties under lettings campaign and told client to pay it all in one go...
Client to me " Let's just give them a cheque for the tax and see what they say"
HMRC to me "Not sure what you think this is all about, he needs to send us a cheque for THE TAX and THE INTEREST, and your client has an interesting take on the penalties regime".
Client to me " Just send them the interest then"
Me to Client (Are you sure that's what you want to do?"
Client "Yes"
HMRC to me"Thanks for the two cheques, we will assess the penalties but consider that your client has deliberately defrauded the exchequer and will get back to you about what level of penalties we want and also whether we feel that he has also cheated the public purse".
Due to the filtering on this website the "Client to me" bit isn't even worth typing.
Clients, don't you just love them!
As a side issue -
If the owner has been lax in declaring rental income, do you know if he's been sending the deposits to a Tenancy Deposit scheme?
If he hasn't, he could be made to pay three times the deposit amount to the tenants.
There's always something else, isn't there :)
That's the stupid thing ...
... all the ones I have had use a letting agent - and wonder how they got caught! The plus side is the agents usually deal with the DPS/TDS side of things.
@ Gubbins ...
... the point is they will find him, they are getting data from many sources, not least looking for multiple property owners at the land registry.
You must put in writing that your professional advice is to make voluntary disclosure now to reduce interest and penalties due. These sort of clients are the ones likely to sue you down the line if they do nothing and get caught.
Another caveat is be careful of MLR if you sign him up and he changes his mind once you work out the financial implications!
Let Property Campaign
I have used the Let Property Campaign for a client who had not declared income received since 2002. I contacted the campaign officers initially to clarify some issues. The officers were very helpful. I submitted the declaration in April and received acceptance in August. Penalties were fixed: mainly 10% but some earlier years 20%. Interest was payable. I would always encourage everyone to use the campaigns because the penalties are lower than declaring outside of a campaign. And the streamline nature of a campaign declaration mean it takes less accountant's time.
HMRC's campaign is at http://www.gov.uk/let-property-campaign
HOW??
How can HMRC find out if a landlord has undeclared rental income? Do they have authority to peruse bank statements in secret (ie. approach the bank without the customer knowing), and look for line items with words like.. John Doe - Rent payment, or Rental fee, etc?
HMRC does not divulge the sources of information
I have known them in the past to identify undisclosed income by reading adverts in newspapers, shop windows, tip-offs and disgruntled tenants etc. Today they will get information from agents, SDLT returns, deposit schemes and social media.
"How can HMRC find out if a
"How can HMRC find out if a landlord has undeclared rental income?"
Google is your friend -
http://www.theguardian.com/money/2014/mar/15/landlords-hmrc-undeclared-l...
http://www.mgchayles.co.uk/it-is-only-a-matter-of-time-until-hmrc-finds-...
http://www.tax-hell.co.uk/how-do-hmrc-find-out-about-rental-income/
But does it matter where the information comes from?
It doesn't matter where the information comes from or the likelihood of being found out, if we become aware of undisclosed income we must advise the client to disclose or cease acting for them and make a ML report.
My client's prompted disclosure ...
... was triggered by the tenant having a baby and making enquiries about additional benefits
HMRC ...
... are starting to liaise with other departments, in this case land registry (which anyone can access anyway).
Rocket science it ain't to see if someone is freeholder of more than one property, and then find out (again from public record) who is on the electoral role at those addresses. It is then not hard to find out which of those that have other persons registered are rented, especially if, as above, those tenants are claiming benefits!
Well
No hiding place, soon ! Big Brother is watching.
Well if he is watching people avoiding tax, he has my full support!
what is wrong ...
No hiding place, soon ! Big Brother is watching.
Well if he is watching people avoiding tax, he has my full support!
... with avoiding tax, surely that is why clients employ us!
But he didn't say that ...
... tax evasion is the illegal avoidance of tax, being pedantic, without the "illegal" prefix the assumption by general usuage is it is legal.
It is a bit like saying the police should target people driving at 50mph wthout adding "in a 30mph speed limit zone"
Terminology
I think some clarification is called for here:
"Avoidance" is legal (ie. don't tell lies, use tax laws / reliefs to one's advantage)
"Ineffective avoidance" and "abusive avoidance" comes about where a dodgy tax barrister sells his/her signature to promotors of a dodgy tax scheme and the taxpayer is conned out of fees by the scheme promotor and (I expect) the dodgy tax barrister gets away scot-free with well lined pockets.
"Illegal avoidance" is where the taxpayer and/or tax scheme promotor and/or barrister expressing an opinion KNOW that something is being misrepresented and untrue.
"Evasion" is telling lies and illegal.
Somewhere within the above "spectrum" of attempting to reduce tax liabilities there are very dodgy schemes, the hallmarks of which include / have included in recent history:
Tax losses from a "partnership" are claimed and said partnership has only conducted a minimal number of transactions and never was intended to generate profit, the sole purpose of said partnership was to generate tax losses to gain tax reductions, quite likely that one of the handful of top tax barristers who are dodgy has sold his/her signature to the promotors and endorsed the dodgy scheme as being lawful and effective.More than two or three parties are involved in what in effect is a contrived and complicated series of transactions which appear to be circular in nature.Offshore transactions and parties are involved
I think that where, as has recently been alleged, some tax barristers have recklessy endorsed tax schemes then those tax barristers at the very least need to be "struck off" by their professional supervisory body and better still be successfully prosecuted and handed custodial sentences.