Buy-to-letwatch: Keep up with tax rules

HMRC is stepping up its efforts to chase landlords that avoid paying tax and advisers need to know the rules or face the consequences  

Whittaker_David_2015

In 1946, George Orwell proclaimed: “When one watches some tired hack on the platform mechanically repeating the familiar phrases  – bestial atrocities, iron heel, blood-stained tyranny, free peoples of the world, stand shoulder to shoulder – one often has a curious feeling one is not watching a live human being but some kind of dummy. The appropriate noises are coming out of his larynx but his brain is not involved.”

This sounds familiar. In the run-up to next month’s election we have been constantly hearing about “hard-working families”, “democratic deficit”, “deficit reduction”, “NHS funding crisis” and “tax avoidance and evasion”.

Indeed, if there is one thing all the political parties can agree upon (at least in public) it is that the Government needs to raise several billion pounds through clamping down on (legitimate) tax avoidance and (illegal) tax evasion. 

Nearly a year ago in Buy-to-Let Watch, I wrote about why brokers should take an interest in landlord clients’ tax affairs and highlighted how inattention to such affairs could:

  • Cause you to lose business income
  • Expose you to committing a criminal offence
  • Cost the Exchequer revenue, which ultimately costs us all.

While I have not changed my stance, it would seem HM Revenue & Customs and the Government are becoming much more active in chasing landlords that deliberately (or otherwise) avoid paying tax on rental income or capital gains. 

With the imperative to meet the targets set in the new Parliament, this clampdown is only going to become more rigorous – particularly as HMRC reported in January it had collected record amounts of capital gains tax through probing into (mostly buy-to- let) property transactions. I suspect the success of this campaign may well mean these tax investigations will be exempt from any Government departmental budget cuts for the foreseeable future. 

Previously, HMRC would check the Land Registry and electoral role to track down landlords but now information is collected from a much wider range of sources, including letting agents and even social media.

After all, it is not difficult for HMRC to search records of sales of properties (at Land Registry) and then check on anybody who has sold multiple properties to ensure they have submitted appropriate capital gains and income tax returns. I suspect many an “accidental landlord” could be falling foul of at least one of these requirements as well as many other (full-time) landlords who have been told by “a mate down the pub” they do not need to do so.

As brokers, you do not have the option of taking a view on such transgressions. At the very least you should ensure the client has disclosed their affairs fully to HMRC. If they fail to do so you should consider submitting a Suspicious Activity Report to the National Crime Agency. 

Deliberate tax evasion is fraud and if you fail to report the client then you are exposing yourself to:

  • On summary conviction, a fine of up to £5,000 and/or six months imprisonment.
  • On conviction on indictment, the maximum term of imprisonment rises to five years.
  • Loss of future livelihood as such a conviction would make you unemployable in the finance industry.

So what do you need to look out for?  Here are a few suggestions:

  • Client shows you a schedule of properties worth £6m and with mortgages amounting to £2m – but the tax return shows a profit of just £15,000.
  • Client has two high value properties with modest mortgages and is only prepared to provide evidence of rental income with copy of ASTs and bank statements to show rent arriving at his bank account.
  • Client sold a property that he has owned for several years in 2013/14 – and yet the tax return does not mention any capital gains
  • An “accidental landlord” only has earned income on his tax returns.

I am not suggesting the SAR should be your immediate response since there may be a legitimate explanation. Indeed, if the client agrees to engage properly with HMRC, then the onus is on it to start the criminal process if the full facts so require. I am suggesting brokers should ensure they are up to speed with the regulations and their obligations.

BTL