HRMC Increases Compliance Activity in the Property Sector

Danielle Ford is Head of Tax Disputes and Resolutions, and Riocard Hoye is Senior Manager at Haysmacintyre. In this article, they discuss important points regarding the HMRC's compliance activity in relation to rental property income.

HMRC receive a lot of information relating to UK property from sources such as mortgage lenders, the Land Registry and lettings agents. This information is high-quality and HMRC are able to compare this to tax returns submitted to determine whether they believe rental income should have been declared, or a greater amount should have been declared. HMRC will launch compliance activity off the back of a risk assessment.

Traditionally, HMRC’s compliance activity would have involved a full-blown enquiry into a specific tax return; however, we have recently seen HMRC adopt a ‘one to many’ approach. This is where HMRC write a ‘nudge letter’ to individuals who they believe have under-declared rental income, inviting a disclosure to HMRC.

It is important to note that a nudge letter is not a statutory enquiry into a taxpayer’s affairs. However, these letters should not be ignored, and appropriate action must be taken. This does not mean signing and sending the requested certificate to HMRC; there is no statutory requirement to do so. If HMRC subsequently open an enquiry and find an error, failure to take action following receipt of a nudge letter could lead to higher penalties being charged.  

The letter from HMRC states a disclosure should be made to HMRC under the Let Property Campaign (LPC). The LPC offers a defined process for making disclosures, either in writing or online, where HMRC have 90 days following receipt to review and follow up with any questions they may have.

We have assisted many of our clients in making LPC disclosures to HMRC which have been successfully accepted. We utilise our knowledge of HMRC penalties to secure the maximum possible penalty reductions for our clients.

The LPC is not only available to those who HMRC have written to. It is available for those who wish to make a voluntary disclosure, and in fact those who have had no prior contact from HMRC will be able to settle with HMRC on the most favourable terms.

Where HMRC have written to an individual, any disclosure is considered ‘prompted’ by the actions of HMRC, and the maximum reduction for penalties is capped. In contrast to this, an individual who voluntarily makes a disclosure to HMRC is considered to be making an ‘unprompted’ disclosure, and penalties can be mitigated by the maximum possible. To illustrate this point, where a deliberate error is made in a tax return, the penalty range is 20% to 70% when ‘unprompted’, compared to a range of 35% to 70% when the disclosure is ‘prompted’.

Once satisfied the disclosure is complete and correct, HMRC issue a letter of acceptance which provides certainty and finality for the taxpayer. This is reassuring for those that are affected as it signifies a clean slate going forward.

We recommend seeking professional advice to determine whether a disclosure is required, to identify the tax years which should be included in the disclosure, to prepare the disclosure, to negotiate the level of penalties with HMRC and to liaise with HMRC on your behalf. For more information, or to discuss an HMRC communication, please email taxdisputes@haysmacintyre.com or visit our website.