Handling a property tax compliance investigation or “compliance check”. Our specialist tax and accountancy partner provides useful insight and guidance

by Property118.com News Team

14:42 PM, 27th October 2010
About 9 years ago

Handling a property tax compliance investigation or “compliance check”. Our specialist tax and accountancy partner provides useful insight and guidance

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Handling a property tax compliance investigation or “compliance check”. Our specialist tax and accountancy partner provides useful insight and guidance

More and more investors and landlords who have not owned up about their property profits are under scrutiny from the taxman.

The first indication you are under investigation for unpaid tax is often a benign ‘compliance check’ letter through the door.

To seem more consumer-friendly, HM Revenue and Customs changed the terms ‘tax inquiry’ and ‘tax investigation’ to compliance check.

Don’t be fooled – this letter is signalling the onset of a full tax investigation.

Next, the tax inspector politely writes: “I understand you may have received income from property letting but I am unable to find any record that this income has been notified to HM Revenue and Customs.”

This is a shot across the bows telling you clearly that the taxman knows you have had property income that you have not declared on a tax return – and he wants you to own up.

Dissecting the letter further:

  • ‘Income from property letting’ covers a range of activities – from receiving rent or selling a property liable to capital gains tax.
  • ‘Any record that this income has been notified’ means the taxman has looked at your file and your tax returns don’t tally with his information from other parties.

Next, you are invited to call the tax inspector.

Whatever you do, don’t call – handling a tax investigation can become a nightmare that eats time and money and piles on unnecessary stress if you do not know what to do.

Talking on the phone will merely confirm the taxman’s suspicions and you will probably inadvertently give more ammunition for him to fire back at you.

The main fact to consider here is the taxman knows you have failed to declare some income.

Many of these letters originate from a unit based in Northampton that specialises in tracking down property investors who have broken the tax rules.

HMRC has a vast toolkit of technology and intelligence that roots out potential tax avoidance, from links to council housing benefit records, the electoral roll, and Land Registry to accounts from letting agents and bank statements.

When you read the letter, remember the taxman has already put together the evidence and is expecting you to own up and pay the tax.

Compliance checks can cover many tax years, even if the property you let out was sold meantime.

All the while the inquiry runs unresolved, you are stacking up unpaid tax, interest on the unpaid amount accruing daily and fines for failing to file accurate and timely tax returns – not from the start of the inquiry but from the date the original tax was due.

At worst, the penalties can be 100% of the tax owed plus interest.

That’s why you need a tax professional and let them handle the inquiry for you.

They will take on the stress and hassle.

You will probably end up paying less tax and penalties than dealing with the inquiry yourself because they will negotiate penalty ‘discounts’ you are unaware of for prompt and honest disclosure.

They will also make sure the tax inspector plays fair by confining the inquiry within agreed parameters – like certain tax years.

Your advisor also knows that your tax inspector is probably on performance-related pay and receives a bonus based on whatever is clawed back from you.

If the tax inspector sees you have professional representation that keeps the inquiry on track, often, HMRC reaches an earlier and more amicable settlement.

A professional tax adviser will also draft income and expense schedules and capital gains tax calculations that include allowances, losses, and reliefs to reduce the tax liability.

Whatever you do, do not throw a compliance letter in the bin, or fail to reply.

The inquiry will not go away, and the inspector can increase the penalties if you are considered ‘unco-operative’.

Unlike dealing with crime, the taxman will assume you are guilty unless you can prove otherwise – and that can take a great deal of painstaking work putting together financial records that stretch back over the years.

If you have received income from property investment and not told the taxman, then you need to make a decision.

The probability is you will be found out in the fullness of time, but the taxman is dealing with older cases before turning the searchlight on to you.

  • If you do nothing, you run the risk of paying more interest and fines the longer you stay quiet.
  • If you ‘fess up’ you will still have to pay the tax and some interest and penalties, but you pick up your good behavior discounts.

The smart money should go on the second option – not only will you earn more respect from the taxman and sleep easier at night, but the tax adviser’s bill will be less because not so much of your financial past needs unravelling.

Sometimes, compliance checks are unjustified and can be dealt with quickly.

For instance, an inquiry was launched in to rental income from a house a taxpayer had never owned but was rented from a housing association and lived in by a relative.

The inquiry came about because the taxpayer had mail diverted to the address while living abroad.

Editors Notes

If you are worried about tax or have a compliance check letter please call The Money Centre’s Customer Care Team on 01603 894525 and they will be delighted to refer you to our Joint Venture Tax Partners who specialise in property taxation. The initial introduction is a no cost no obligation service.



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