Tax investigations a constant threat for landlords in today’s data-rich world

Landlords have long been under the scrutiny of HMRC due to the widespread issue of undeclared income from additional properties. The revenue authority’s campaigns targeting this sector have become increasingly robust, posing significant risks for individuals with second properties.

HMRC have consistently targeted landlords to ensure compliance with tax regulations. It is critical for landlords to ensure that income from second or multiple properties is reported correctly. Letting out a property can be managed in several ways, including through lettings agents, private arrangements, and both formal and informal agreements. Regardless of the method, all profit made from these activities must be declared to HMRC.

Where HMRC are aware of an individual owning property other than their main residence, they might ask specific questions about property purchase dates and usage. It is quite common for this review to be undertaken by issuing nudge letters. At Markel Tax we have seen the regular use of nudge letters, providing a clear indication that this is key target area for HMRC. It is important that the appropriate action is taken when HMRC make an approach in this way with full consideration given to the factual circumstances.

HMRC have become more sophisticated in its use of data and accessing sources of that data, enabling it to up the pressure via nudge letters. In the case of the rental market there are a range of data sources, which may be an added incentive for HMRC to target the sector.

Extensive data sources are helping HMRC spot tax avoidance

Traditional data sources for landlord-related information include the Land Registry, which provides details on property ownership, including location, price paid or property type over a defined period of time. In addition, letting and estate agents may be  required to supply data to HMRC about rents collected from tenants on behalf of landlords who have used their letting agency services.

More involved methods of data collection can lead to additional insights for HMRC:

• Stamp duty land tax records – which can indicate ownership of multiple properties, with the likelihood that some are being used for rental purposes.
• Security deposits – if the contract is an assured shorthold tenancy, landlords must put deposit into a government-approved tenancy deposit scheme. HMRC has access to these schemes and their information, providing a useful source of additional information
• Electoral register – registration for the electoral register is via national insurance numbers and HMRC is able to link individuals to property ownership via this data source
• Informants – such as tenants or neighbours may also report landlords for a variety of reasons, and this information can add to HMRC’s data bank.

By mining and analysing data from these sources, HMRC can accurately identify property owners and assess whether they are reporting their rental income correctly.

Let Property Campaign (LPC) offers route for landlords to safely declare tax liabilities

Many landlords have owned property and generated rental income for years without proper tax declarations. Markel Tax regularly assists clients with disclosures under the Let Property Campaign (LPC) which, according to HMRC, ‘is an opportunity for landlords who owe tax from letting out residential property to get up to date with their tax affairs’. By participating in the LPC, landlords can disclose undeclared income and settle their tax liabilities, thus avoiding more severe penalties and detailed investigations.

This initiative has remained open since 2013, differing from other HMRC campaigns that typically have a fixed end date of six months or a year. The LPC’s ongoing nature underscores its success as a revenue-generating tool for HMRC. In the three tax years leading up to 2022/23, the compliance yield from the LPC was just over £107 million.

For accountants, understanding HMRC’s focus on the rental sector and the various methods it uses to ensure compliance are important. The Let Property Campaign remains a vital tool for addressing undeclared rental income, offering landlords an opportunity to come forward and rectify their tax affairs. It is important to understand the process involved to ensure the correct years are assessed, based on the client’s circumstances, and also to ensure the appropriate penalties are applied. Clients need guidance through this process, ensuring they comply with HMRC’s requirements and avoid the risks associated with non-compliance.

Markel Tax’s James Cordiner is a former Inspector of Taxes who worked in HMRC for more than 17 years in a variety of roles. He joined Markel Tax in 2005 and has since applied his extensive experience of handling tax enquiries to provide a comprehensive service to a wide variety of clients from a diverse selection of trades and professions.  He prides himself on delivering a high standard of customer service and getting the best possible outcomes for clients under enquiry by HMRC. James also has extensive knowledge of the Alternative Dispute Resolution process having been involved with this since its inception as a pilot scheme.