HM Revenue & Customs compliance checks on property income

Monday 3 March 2008

HM Revenue & Customs (HMRC) has launched a campaign aimed at those who receive income from property but have not disclosed it on their self assessment tax return (or informed their tax office so that an adjustment can be made through the PAYE system). So what are HMRC doing and who will this affect?

What is HMRC's approach?
Press reports have noted that HMRC has started issuing letters to taxpayers to gather information about their income from property.  Where a taxpayer has authorised an adviser to act on their behalf the letter should be sent to them too.

It is believed that initially only a few hundred letters will be issued to see how effective the process is. The individuals will receive guidance with the letter on what is expected of them. Most importantly those who receive a letter will be expected to reply within a short time frame ‑ 30 days ‑ and if they do not reply the situation will escalate.  One would expect HMRC to move to opening a formal enquiry and in extreme cases a criminal investigation.

Who are HMRC sending letters to?
HMRC is likely to target those about whom it has information indicating that they let property but have not disclosed any property income (or losses).  Many forget that losses are reportable on tax returns.

What information do taxpayers need to report?
In response to the letters, individuals need to record rents and expenses for the tax years specified.  There will be guidance as to the types of expenses that can be claimed, such as rents and rates, repairs and maintenance, mortgage interest, legal and professional costs, services and other related expenses.  If the individual had no taxable income to report then they should inform HMRC of this as soon as possible to end the matter.  Similarly, where losses have arisen, taxpayers should advise HMRC accordingly.

Francesca Lagerberg, Head of the National Tax Office at Grant Thornton says: "Some taxpayers may not have been aware that they needed to declare their rental income where a loss has arisen for tax purposes.  For example, where the mortgage interest exceeded the rental income.  Taxpayers now have the opportunity to record their rental losses, that can then be carried forward to reduce any future rental profits."

"Equally those who should have reported income but have not, for whatever reason, should look to put their tax affairs in order as soon as possible and if necessary take professional advice."

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