Why landlords need to get their tax affairs in order
Usually, the start of a new year sees a rush of would-be business owners looking to break free from the shackles of employment and become their own bosses.
However, while I have certainly seen a few new clients of this nature, the biggest number of enquiries has been from private landlords wanting my help to ensure their tax affairs are in good order.
In almost all cases, the enquiries have been triggered by a letter from HM Revenue & Customs questioning whether all taxes due have been paid.
My firm, Phillip Bates & Co, has more than 100 private landlords as clients, but this is the first time I can recall the issue of tax being such a big issue.
The background is that HM Revenue has stepped up its campaign to bring to book any landlords who they believe are avoiding paying tax due on rental properties.
Figures for 2013-14 showed that tax inspectors obtained more than £130million as a result of enquiries into underpayments of capital gains tax.
Fewer than 500,000 taxpayers are registered with HMRC as owning second properties. HMRC estimates that the true number of landlords is much higher, at around 1.5 million.
The phone calls to my office since the turn of the year suggest that HMRC is not going to rest until it has significantly increased the number of landlords they have registered.
The potential penalties for not ensuring you have registered with HM Revenue & Customs are severe.
A landlord must pay tax on profit just like any other business but only after costs – known as allowable expenses – have been deducted.
This is where there is sometimes uncertainty. For example, allowable expenses do include reasonable repairs and maintenance to keep a property in good order, but they do not cover renovation costs incurred prior to letting or extensions, although these can usually be claimed for capital gains tax purposes when the property is sold.
The potential penalties for landlords failing to pay their tax are severe – as much as 35 per cent of the potential lost revenue is standard, where HMRC makes initial contact with landlords.
The Revenue is able to gather information on private landlords from various sources. The way to avoid a nasty investigation is to register as soon as possible and ensure your tax affairs are in order.
The penalties are likely to be reduced or avoided entirely if a landlord advises HMRC first rather than waiting for the Revenue to catch up with them.
*Phil Bates is the Principal at accountants Phillip Bates & Co.
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