Have HMRC made disclosures or telling them about undeclared let property income easier? To the inexperienced, it would appear so. In this article we comment on some of the pitfalls which may result in the individual paying more tax than they might have to.
The digital disclosure service allows a disclosure to be made within a non-confrontational framework. It suddenly appears easier because for one, the person disclosing doesn’t have to face a HMRC officer. A taxpayer may make their own disclosure, which has the obvious advantage of not having to pay a specialist adviser or even their accountant a fee. Obviously, an unqualified and unexperienced person interacting with HMRC even through the ‘safety’ of the internet carries risks.
The digital disclosure service requires you to complete a form providing your address, unique tax reference or national insurance number and the nature of the undisclosed income. You can notify the intent to make a disclosure or even make a disclosure. You will be provided with a disclosure reference number and a payment reference number. Once notified there is ninety days to make a disclosure and pay the tax. You even get to calculate your own penalties.
All appears simple apart from:
- How many years do you need to disclose?
- What is the nature of your behaviour giving rise to the tax irregularity?
- How do you work out your liability if you don’t have all the records?
- What records do you need?
- What is allowable to reduce the income?
- Is the income solely yours or that of a spouse or partner?
- Do you need to include the income of a property sold years ago?
- How do you disclose a gain realised on a property?
- Do you have to disclose a property you owned that family members lived in?
- What are the legitimate ways you can present the best tax position for you?
Legislation provides time restrictions on how far back HMRC can seek tax depending on the behaviour giving rise to the tax irregularity. Where the behaviour is deliberate, HMRC can recover taxes for the previous twenty years. However, what constitutes deliberate and non-deliberate behaviour is not straight forward. Admittedly, a HMRC officer will normally consider any non-disclosure of income to be deliberate. I mean, who in their right mind, would not disclose their income? It is a ludicrous proposition isn’t it? If you have not declared income and you have a responsibility to do so, you must have not declared that income deliberately.
A HMRC officer will often state that because the income went undeclared for a long period, the behaviour had to be deliberate. Unfortunately, that approach ignores the genuine tests for considering the behaviour of a taxpayer. Herein lies a further difficulty for the HMRC officer in that the test requires them to stand in the shoes of the taxpayer. The problem is that an officer, who has been through their vigorous training and who sits with other officers having to consistently deal with fraudulent taxpayers is likely to have a tainted view on taxpayers. Officers work in a much different environment to most taxpayers. They are unlikely to be made redundant, will get promoted slowly as senior people into retirement and the provision for retirement is not too shabby. It is likely most officers don’t understand the pressure, stress and tribulations a taxpayer faces. A taxpayer who runs their own business with a young family has probably faced unprecedented pressure over the past decade given the global economic crisis, remain vote, Brexit, covid, wars and change of political leadership. These circumstances probably aren’t enough to result in non-deliberate behaviour and instead a deeper level of understanding personal influences will be required. It may be worth the effort considering non deliberate behaviour may result in six years being subject to tax rather than twenty years.
Another common problem is the approach adopted to calculate liabilities where information has not been kept. Banks can normally provide statements for up to ten years so where a separate bank account has been used to receive income and meet expenses the exercise may be made easier. Where records are not available but ownership for a longer period is known due to land registry records, the exercise requires more creativity. A method of extrapolation could be proposed maybe reducing income by inflation or records of average rents in an area. This is however, not accurate and the property may have had non-tenanted periods. In between tenancies, repairs and maintenance may have been undertaken and it may be difficult to demonstrate expenses incurred or whether they are capital or revenue in nature. Often, property owners take photographs of work undertaken on property and this may demonstrate the expense incurred leaving the quantum of expenditure open to negotiation. HMRC may not accept the expenditure in the absence of primary evidence although where an agent has experience with other cases, this may leverage an agreement since all taxpayers should be treated fairly.
The digital disclosure service is for disclosing income and not the disposal of a property. Many second property owners have ended up with a rental property by virtue of letting out a previous home. There are specific rules for calculating gains on former main residences that could substantially reduce the taxable gain. The tax free period of occupation may be extended by reliefs where the property was vacated for work reasons and all former main residences qualify for a deemed period of occupation after the property is no longer the main residence. The rules have undergone substantial change over the years and the historic entitlement to reliefs is greater than that available today. However, the law at the time the property was disposed of is relevant and not the rules today. Knowing the correct treatment could reduce liabilities significantly. Whilst it may be expected that HMRC will also adopt the correct rules, this is not always the case!
Before making a disclosure, you should consider all the potential mitigating factors and consider the best way to present these. The disclosure facility doesn’t permit all relevant facts to be presented and often it will be necessary to prepare a proper analysis in the form of a disclosure report that is subsequently presented to HMRC.
If you have undisclosed rental income or have disposed of a property and not reported the gain to HMRC, it will be worth considering your options. Property ownership and whether occupied by the owner is easy for HMRC to identify. In fact, they already know. HMRC database identified owners of second properties over five years ago. The number of owners was considerable and HMRC has slowly been working their way through such identified owners. Due to resources, HMRC has been unable to simply approach all owners and instead offered the let property campaign for people to come forward. Those that haven’t come forward will eventually be targeted and their continued non-disclosure is likely to result in HMRC pursuing higher penalties and possibly taking a more aggressive stance.
We have recently written a article on what a Let Property Campaign disclosure looks like. It can be read here