How to handle a property tax compliance letter

Landlords and property investors are receiving letters from  the taxman that seem to ask innocent questions about their property businesses but really have a sting in the tail.

Guest Blog provided by Steve Sims, author of ‘Understanding And Paying Less Property Tax For Dummies’.  Steve and his wife Amanda also have a boutique accountancy business which specialises in providing taxation advice and accountancy services for property investors.

These letters are disguised tax investigations – and the consequences of failing to act on them can lead to fines and penalties for failing to file tax returns and pay income tax or capital gains tax.

Identify the letter

The HM Revenue and Customs property tax compliance letter template is standard across the UK.

It reads like this: “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 & Customs.”

The letter will have ‘Local Compliance’ in the top right hand corner.

What does it mean?

The tax inspector is telling you that he or she knows you have received rent or sold a property other than your home and you have not declared the income or gain.

The letter is an invitation to come clean and submit the financial details or face a full tax investigation.

What happens if I tell the taxman about my rent or capital gain?

You will have to pay the tax owed, plus interest and penalties. Generally, you receive a ‘discount’ for owning up and although you will have to pay the tax owed, you can often negotiate to avoid any penalties and interest.

What happens if I don’t tell the taxman?

The taxman will go after every penny possible – including penalties and interest. It’s likely you will be tied up in producing financial documents going back years.

Is the taxman fishing?

No. In most cases, the taxman has documentary evidence of unpaid tax, ranging from letting agents rent records, property sale information from the Land Registry to housing benefit and electoral roll details from local councils.

HMRC has special property investigations units cross referencing information from tax returns, the Land Registry, local councils and other sources.

What should I do if I receive a letter?

• Do not ignore the letter
• Do not talk to the tax inspector – he or she will use what you say as evidence against you
• Talk to a professional adviser experienced in compliance investigations as soon as you can as the letter usually includes a deadline
• Let the agent talk to the inspector and negotiate the parameters of the inquiry
• Find out what evidence the inspector has and ask for a copy – they would have to tell you what they have  before starting any legal proceedings
• Check they are not making a mistake – it does happen. Don’t let HMRC bully you – they can only act within their powers laid down by law, but they will ask you to agree to handing over documents and information you do not have to give
• Set some date parameters on the inquiry, so it’s not open-ended
• Put together income and expense schedules backed up by documentary evidence like bank statements, mortgage statements, receipts for repairs etc
• Don’t make an offer – let HMRC send you a letter asking for a payment
• Negotiate the payment down.

How to find professional advice

If you need a property business check or help keeping financial records and preparing tax returns, a link to Steve’s web-site can be found HERE.

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