The landlord letters, on the face of it, are concerned with the annual tax on enveloped dwellings (ATED) and income tax on rental income.
Their purpose is said to be to help ensure the correct tax is paid in respect of these matters. However, the letters are confusing and the information requested is wide-ranging and well beyond what is required to satisfy their stated purposes.
The information requested potentially has much broader implications, such as benefits from occupation in the case of trust beneficiaries, inheritance tax (in respect of settlement of trusts) and even whether the source of the funds to acquire the property has been appropriately taxed.
It is not clear what work HMRC has undertaken to establish the degree of risk of non-compliance as opposed to embarking on a “fishing” expedition. Also, given that both landlord and tenant cannot be liable on the same rental income, HMRC’s two-pronged approach will inevitably inconvenience a recipient of the letter that has no additional tax to pay, because tax has either been appropriately withheld, or the landlord has registered and paid tax under the non-resident landlord (NRL) scheme.
What information is HMRC requesting?
Letter to occupier
This letter notifies the occupier that tax may need to be withheld from the rent and paid to HMRC by the tenant. It partly explains the circumstances when this will be required and how to register to pay the tax due. It also includes a form which requests the information below, much of which is not needed to ascertain the correct amount the occupier needs to withhold:
- The full name and any previous names of the occupier, their national insurance number and UTR number, their date of birth, contact details and UK residence status
- The date they moved into the property
- Whether rent is paid, if not, why
- To whom the rent is paid
- The connection (if any) with the owner
- Whether the property is owned by a trust. If so, the name of the trust, the trustees, settlors and beneficiaries, when and how the trust acquired the property, including when it was transferred if not purchased by the trust. The letter even suggests a copy of the trust deed should be enclosed, if available.
The occupier, although potentially liable for income tax, is likely to be alarmed and confused by the suggestion that they may need to withhold tax, and may be bewildered by many of the questions.
Letter to the owner
This letter refers to ATED and the NRL scheme, requesting that non-resident company tax returns to be sent to them if the landlord lives abroad and lets out the property. Whilst landlords often find it beneficial to register for the NRL scheme they are not obliged to do so if tax is being withheld. It is also confusing, given the company owner is not a natural person, to suggest that the landlord can “live abroad”.
The letter requests the substantial information below on the ownership structure of the property if it is owned by a trust, (which is confusing given the letter starts by referring to the company as the owner):
- The name and address of the trust
- The HMRC reference number for the trust (if registered)
- The names of all settlors, trustees and beneficiaries of the trust
- The date when the trust was set up
- To know how the trust acquired the property
- The value of the property when it was transferred into the trust
- The name of all people occupying the property
- To know if the occupier(s) of the property has any connection to the trust.
The letter implies this information is required irrespective of whether the owner has correctly registered for ATED and under the NRL scheme and again goes further than is needed to establish the stated liabilities.
How to respond?
These letters have no statutory force. The occupiers are not under enquiry and the owner is not resident in the UK. Any response is therefore voluntary.
However, recipients should bear in mind that HMRC has wide-ranging powers that can be used where it suspects tax has been under-assessed. The test is unlikely to be satisfied simply by HMRC holding information about property being owned by an offshore company. More work is likely to be needed to join the dots to form a suspicion of underpayment of tax.
It is possible that a potential tax liability could arise, and, as noted above, this may go beyond those liabilities stated as being addressed in the letter. It may also include obligations to register with the Trust Registration Service.
Having been “nudged” by these letters, owners and occupiers should not ignore them unless they are completely comfortable that all potential liabilities have been addressed. Recipients will need to review their position to confirm whether they are tax compliant across all areas where the information sought by HMRC could have an impact.
Given the complexities, this is likely to involve seeking professional advice in order to be certain. If HMRC undertakes further work to reach a suspicion of underassessment, information could be demanded and the opportunity to establish mitigation and cooperation from the outset will have been lost. This could have serious implications if any loss of tax is due to deliberate behaviour.
Does HMRC’s compliance end justify its means?
Whilst HMRC clearly needs to tackle non-compliance, a more focused approach based on a full risk assessment should be undertaken. HMRC’s scattergun approach of shaking the tree and seeing what drops out risks confusing and inconveniencing innocent and compliant taxpayers, who have no additional tax to pay and no obligation to provide information relating to other another party’s potential tax liability.