Could You Face Investigation by HMRC?
When you do your taxes, have you ever thought about what might happen if HMRC looked into your latest tax return?
It’s not easy to find anyone who relishes doing their accounts. It’s hardly a pastime that many of us look forward to sitting down and cracking on with.
But, unfortunately completing HMRC’s requirements is one of the tasks that you really can’t ignore or bury your head in the sand about. Ignorance of the rules is not an excuse to fluff this one up or be late with your filing, and getting things wrong can leave you hot under the collar, and with some hefty fines.
In this episode:
- Chartered Accountant and Chartered Tax Adviser Richard Cunningham gives us the low down on what to do if you have made errors on your tax return, and what this means for your bottom line
- An overview of the most common errors, how HMRC catches them, and (most importantly!) how to avoid making them!
- Buildings Insurance specialist Sunny Channa talks though your building insurance FAQs, and why transparency is clearly the way forward
- Mashroom’s Emi Steadman, who’ll be giving us a run through of the ways you can simplify every other element of your landlording life, leaving more time to wrangle your tax troubles
Whether it’s a looming deadline, undeclared income, fear of an enquiry, or uncertainty that you are claiming all you can, everyone has had a sleepless night over tax at some point.
We sat down with landlord tax superstar Richard Cunningham to clear up a few facts about some of the scarier elements of landlord tax… What happens when it goes wrong and HMRC come knocking!
Could HMRC investigate me?
‘The first thing to say is it can’t happen at random. But they tend to approach this on assessment of risk. And they get data from various sources so it can be banks, land registry, DVLA, that kind of thing,’ said Richard.
They will look at what’s on the tax return and they’ll look at the information that they hold. And if it doesn’t match, then that’s when they’ll raise an enquiry.
Common tax mistakes
With visibility of bank accounts, land registry and even the DVLA, it’s clear that huge amounts of ownership and financial data is available to HMRC. It’s easy to see how people slip up and make mistakes that cost them big. What are the most common mistakes?
- Loan interest claims. If you go back five to six years ago, a landlord could claim 100% relief for interest on their mortgages. Now, you can only effectively get basic rate relief, but there are still people out there that will claim the full relief, so that will trigger an inquiry
- Capital expenditure vs. revenue expenditure. People claiming capital against income. For example, you may put a conservatory on the back of your buy-to-let, which would be a capital spend, and you will get tax relief for those. But when you’ve come to sell a property, you can’t offset that against your rental income for the year.
- Late filing of returns. Tax returns need to be filed by the 31st of January. So, if you file late, you’re going to get a £100 fine after three months, then it’s £10 a day for 90 days. After six months you’ll get another £300 fine or 5% of your tax, whichever is higher. And after 12 months, another £300 fine or 5% of your tax.
‘You’ve also got to pay interest for late payments. You’re also going to be paying 5% of the tax due after 30 days, another 5% after five months, another 5% after 11 months’, said Richard.
‘Up until recently, people were fairly laid back in terms of paying their tax when you looked at the interest that was being charged, but obviously with interest rates have gone up significantly. People are paying 1% and you could swallow that, but now the rate is 6-7%, and all of a sudden that’s dramatic. It’s getting more expensive!’
How to avoid the tax trap
Ok, so we understand the issues, what steps can we take to ensure we don’t get caught in a tax trap? None of us are going to try and fox HMRC on purpose, of course, but is there anything we can do to make sure we don’t do it unwittingly!?
‘Wherever you’re claiming, declaring income or claiming deductions for an expense, you need to keep a record of what that expense was,’ stressed Richard. ‘So, a copy of an invoice is the most common, but it’s fine electronically. There’s a lot of common mistakes that people can make and sometimes those mistakes will be genuine errors and sometimes deliberate.’
‘You can keep them electronically, and I know that Mashroom have some quite good tools for helping landlords maintain their records.’
You need to keep records for five years after your filing deadline. For your 2021/22 tax year your filing deadline is the 31st of January 2023. So, you’re talking about January the 28th. That’s normally where people fall down if they don’t keep their records.
‘HMRC do carry out checks into records with your business. If they’re not adequate. You can be hit with a £500 fine if you repeatedly don’t maintain good records and be able to find them up.’
Another massive red flag that could trigger an investigation is a concern about undeclared income. How often do HMRC look into it if someone were to be a little light on reporting rental income?
‘It’s quite a significant number of investigations’ warned Richard. ‘I think people need to be aware that HMRC have access to information about land registry. It’s not hugely difficult for them to work out when somebody has a property and doesn’t declare an income.’
‘All they need to do is go into land registry, find the person and what properties that they’ve got, and check it against the tax return. It’s very easy to identify that gap so they are actively doing quite a bit of it.
And what would be the outcome if they were to find out that there was undeclared income on an account?
‘Obviously, you’re going to have to pay your tax straightaway and you’re going to have to pay your interest, but you’re also looking at penalties. And they have a penalty levy which is largely based on taxpayer behaviour.’
Clearly, failing to declare income correctly is a pricey error. But what if it’s a genuine mistake – are you given any leeway?
‘If you’ve been careless, (but spot the error yourself) you’re looking at 10-30% of the tax that was due as a penalty’, explained Richard. ‘If it’s prompted by the revenue coming along and saying ‘What’s this?’ and you say ‘Sorry, it’s a careless error’ then it’s the lower end, at 15% or 30%.’
‘You’re then getting into deliberate and unprompted. So, for deliberate but unprompted, it’s 20%, prompted it’s 35-70%.’
‘Deliberate and concealed, which is the really naughty end of the scale, you’re talking anything up to a 100% of the tax payable’, warned Richard. ‘I think the employer pays a penalty on top of the tax. So, you will effectively pay double.’
‘I think the important thing to note here is this deliberate behaviour. The onus is on HMRC to demonstrate deliberate behaviour, which can be quite difficult. Where it’s a genuine error, and it’s a ‘first offence’ you’re looking right down at the bottom of that scale. Obviously, for repeat offenders with deliberate behaviour, you’re heading up the other end, although you can appeal these, if you have what they deem a reasonable excuse. They do have the ability to not levy a penalty or even suspend the penalty. But reasonable excuses are fairly few and far between – you’re talking about physical illness or mental illness, that kind of thing where you can clearly demonstrate that you were incapacitated, something like that. That’s a reasonable excuse. Not knowing that that was the law is not a reasonable excuse.’
Don’t bury your head in the sand
Looking at the fines, if you have the slightest inkling that you may have under-declared, being upfront is the most sensible option!
‘Hold your hands up, come clean,’ agreed Richard. ‘HMRC has what’s called a ‘Let Property’ campaign. Revenue often go through a campaign, on plumbers or something like that, for twelve months and say, ‘Look, you’ve got an opportunity to come forward, declare undeclared income, and we’ll go easy on you’. The Let Property campaign has been running for a number of years now and remains open and it’s an opportunity for landlords to come forward and be comfortable that the revenue aren’t going to prosecute them.’
With these kinds of campaigns, the more open you are, the more helpful you are with the whole process, the less likely you are to be hit with a significant penalty.
Tax planning for a rainy day
Getting caught out by HMRC doesn’t sound like anyone’s idea of fun, but hopefully Richard’s tips will help ensure that we can all be a bit more confident in making sure taxing troubles are kept to a minimum.
Whilst we can’t insure against HMRC investigations (except with concise record keeping!), you can make sure the rest of your property portfolio is kept watertight with precise insurance planning.
We caught up with Mashroom’s Buildings Insurance specialist Sunny Chana, who talked us through how to avoid any potential errors that could leave you high, dry, and out of pocket!
‘It is very imperative, very important, for landlords to be truthful about their properties and whatever information they are providing to us brokers when they apply for insurance’, explained Sunny.
Landlords sometimes don’t disclose some of the information, not intentionally, but they totally forget about it. That can cause issues during claims. So, it is very important for them to disclose all the information when they’re taking a policy.
There are some issues we are all familiar with that can cause real problems when it comes to insurance policies – flat roofs spring to mind. It can be difficult to be 100% accurate when gauging size etc. Is making a mistake on the size of something like a flat roof the sort of thing that could catch people out and invalidate a policy?
‘It depends upon the insurer, but nowadays if you have disclosed that there is a flat roof, that covers between 10-20% of your property, that automatically covers you up to 25%,’ explains Sunny. ‘They take it in such a way that they will cover up to 25%, but if you have disclosed it as it’s just 5%, but the flat roof is say, 70%, that it will affect the policy!’
Presumably that could lead to you not being paid out if something went wrong?
‘Absolutely. Many insurers have built clauses in their policies that mean that if you have not disclosed it, or if the flat roof is more than that has been disclosed, then they will cover up to the amount which is disclosed to them’.
Construction is another big factor to consider carefully when planning your premiums. Many of us may be a little woolly when it comes to understanding our property’s build from foundations up, but how much do we really need to understand when it comes to protecting our assets, and are there likely to be any hiccups if we’re not entirely sure?
‘Landlords sometimes don’t disclose some of the information, not intentionally, but they totally forget about it. That can cause issues during claims. So, it is very important for them to disclose all the information when they’re taking a policy,’ stressed Sunny.
When property owners buy their property they always get documentation which they can refer to, when the property was built, the construction type, things like that. If they’re not sure about anything, whilst purchasing the property they can go to the solicitors and the mortgage lenders to confirm so they get all the information prior to the purchase of the property.’
Right, so you have made sure that you have provided all the correct information with regards to construction and have secured a premium that you are happy with. But the worst has happened, your house has fallen down (ok, yes not hugely common, but work with me!) and you need to claim for a complete rebuild. Is this something you should give consideration to from the start of the process?
‘Absolutely. The general rule is lower the rebuild, lower the premium, higher the rebuild, higher the premium,’ said Sunny. ‘But again, this depends upon the insurer.’
‘Nowadays they are coming up with blanket covers but is vital for landlords to understand the rebuild value because insurers will always ask and if you get it wrong and have said that the rebuild value is £50,000 and actually £200,000 the insurer will pay out £30,000 only and the rest of the money will have to be paid out by the landlord.’
Ok, all sounds fairly manageable. Surely nothing can go wrong. Unless… What happens if you realise you’ve said the wrong thing, confused your foundation type, or failed to mention a neighbour’s tree, and unwillingly lied to your insurer? Can you be penalised?
‘It depends on what kind of a lie!’ laughs Sunny. ‘If a landlord has not disclosed anything which was very important to the property and to the court it goes against them. And maybe in the future, they have to pay a higher premium or it’s classed as a non-disclosure can go against them. They may have to pay a higher premium they need to find out a specialist kind of insurance.’
‘If you want to ask any questions about your insurance, absolutely feel free to contact me.’
Other key safety concerns for landlords
So, we’re tax prepped, the building is insured. Everyone should be feeling pretty confident, right? Well, before you hit the ground running, take a moment to consider the other safety elements that our very own Emi Steadman, who’s one of Mashroom’s brilliant landlord product specialists, can bring to the table.
What are the key protection products that today’s savvy landlord needs to have in their toolkit to make sure they are as safe as their houses?
‘I definitely think you need to make sure you invest in the right insurance, which we can absolutely help with, with our 5% package,’ explained Emi. ‘Let’s just say your tenant does get into rent arrears. The landlord with those insurances will know how to deal with it and we’ll know what to do and we’ll know what the next steps are.’
Whilst arguably one of the biggest, rent arrears aren’t the only concern for today’s landlord though. There are plenty of other issues that they can face! How do they best manage those?
‘With our Home Emergency Insurance the landlord will know how to deal with those problems. And I think knowing how to deal with those things is the first step in running a professional business’, stressed Emi.
Compliance as well is another really important thing that landlords need to make sure that they’re always on top of. Your EICR, your gas safety, your EPC. We have our document storage tool, in which you can upload all those documents to keep them all in one place. And then when things are up for renewal, we’ll let you know and then we can book those for you as well.
Prior preparation prevents poor performance
We’re sure both Richard and Sunny would agree, good planning – in both tax affairs and insurance – helps ensure a smoother sail further down the line. It’s all well and good having insurance in place for when the muck hits the fan, but is there anything landlords can do to ensure that they are protected before they start?
‘So, referencing is not a legal requirement, but for me anyway, it is an absolute must that a landlord gets referencing done before they move anyone into their property,’ said Emi. ‘First of all, it gives you clarity on employment and credit checks and whatnot, but also without a pass reference and you won’t be able to get your rent guarantee insurance, which as I’ve mentioned is an absolute must.’
‘Inventories, too – always get one of those at the start of the tenancy! Mashroom can organise that for you. And that will just help if there are any disputes at the end of the tenancy or you need to make any claims, then you’ve got all of that in writing at the start of the tenancy.’
All vital documentation that is key to ensuring that you enter into your tenancy with all of the checks in place. Keeping track of all these bits of paper can be a job in itself though – but there’s an answer for that too, isn’t there?
‘Yes! We’ve got a document storage tool where you can keep all your paperwork and receipts, keep everything tracked on there and keep it all in one place, and we’ve also got our Expense Tracker as well. So that’s fully downloadable, while won’t do tax for you, it will definitely help.’
Talking of disputes, is there anything you can do to help with regards to ensuring deposits are kept as safe as they can be?
‘We’ve got our Deposit Replacement Product which is becoming ever more popular now amongst both landlords and tenants. So, rather than the tenant paying five weeks’ worth of rent upfront at the start of tenancy, the tenant just only has to pay one weeks’ worth of rent, and then the landlord has up to 12 weeks’ worth of cover,’ explained Emi.
‘It’s advantageous for the tenant, especially now with the cost-of-living crisis, as they don’t need to pay as much money in advance and it’s advantageous for the landlord because they’re going to get more than double the cover that they’d get with a standard deposit.’
How can landlords get help with this?
‘Come and speak to us at lettings!’
The next episode of the Mashroom Show is airing on the 19th May, and we’ll be joined again by property solicitor Adrian McClinton, who’s going to be looking at the very real risks involved in the Rent to Rent scheme – something that is growing in popularity, so well worth getting to grips with.
In the meantime, why not head on over to Facebook and join the Mashroom Landlord Community Facebook page. There are over 6,000 landlords regularly chatting, sharing queries and questions and engaging with industry experts, so it’s a great place to have a chat about what’s on your mind, and get some great advice.