HMRC has wide powers to request data from a range of third parties to help it check the tax position of taxpayers. This includes the power to demand that data be provided about a particular class of people, such as everyone who has received a payment from an online service provider in a particular period.
HMRC has recently used such third-party data to identify individuals and companies who appear to have understated their income or gains. These include taxi drivers who find fares through online platforms and now buy-to-let landlords.
Deposit Scheme Data
The Housing Act 2004 requires landlords and letting agents to protect deposits provided by tenants in a government-approved tenancy deposit scheme. This law applies to landlords who let to tenants under assured shorthold tenancies, which are normally used to let residential properties.
There are three government-approved deposit schemes for tenancies in England and Wales:
Deposit Protection Service
Tenancy Deposit Scheme.
These organisations all have privacy policies that allow them to share data with certain government departments, but the Tenancy Deposit Scheme confirms that it will “submit any details requested by HMRC or other government agency or local authority under the relevant legislation.”
Apparently HMRC has made such a request to one or more of the deposit protection schemes, and received data about landlords who have placed deposits with those schemes. The powerful Connect computer program used by HMRC will have matched those landlords’ details (such as name and address) to data relating to individuals who submitted 2020/21 self assessment tax returns.
This month HMRC’s Wealthy External Forum sent 606 letters to landlords who have submitted deposits into a tenancy deposit scheme, accusing them of understating their rental income.
As a tenant’s deposit usually represents four to five weeks of gross rent, HMRC will be able to estimate the total rental income for the year, based on the level of the deposits placed within the scheme.
The letter urges the taxpayer to check and correct their 2020/21 tax return, and their 2021/22 return if it has already been submitted.
The HMRC letter reminds landlords that if they have disposed of the property, they must declare that sale or disposal, and pay capital gains tax (CGT) on any profit they have made.
Not An Enquiry
HMRC points out that the letter does not open a tax enquiry or compliance check, but it does ask the taxpayer to correct their 2020/21 tax return within 30 days.
If the taxpayer thinks they have nothing to correct, they don’t have to do anything. But they can contact the HMRC team managing this particular nudge letter by email: [email protected] or phone: +44 (0) 207 702 8282.
An HMRC spokesperson commented: “This letter raises awareness of specific requirements concerning tax compliance and gives the customer an opportunity to get things right for their next self assessment tax return.”
Some landlords have claimed business asset roll-over relief (TCGA 1992, s 152–159) on the gain made on the sale of a residential property. This CGT relief can only be claimed in respect of gains that arise from assets that have been used for a trade, profession, vocation, office or employment and the funds released (on an equivalent amount) are invested in replacement qualifying assets.
A property-letting business is not categorised as a trade unless the letting meets the conditions for furnished holiday lettings (FHL), which is deemed to be a trade. Thus, the disposal of a residential property from a normal property letting business would not qualify for business asset roll-over relief.
HMRC’s Wealthy Team has written to taxpayers who have claimed business asset roll-over relief on the disposal of a residential property in a year prior to 2020/21. The taxpayer is advised to review the disposal to check if it meets the criteria for roll-over relief and to seek professional advice.
What To Do
HMRC should copy these letters to the tax agents acting for the taxpayers concerned, but that copy process doesn’t always work.
If the taxpayer has not fully declared their rental income for several years, they may be best advised to make a full disclosure using HMRC’s Let Property Campaign, which was launched in 2013.
Landlords who have incorrectly claimed business asset roll-over relief several years ago may be in deeper trouble, as penalties could be applied for a deliberate error or even for a deliberate and concealed error. HMRC recommends that those individuals should use the digital disclosure facility.