These types of nudge letters have become a regular tactic for HMRC and to a degree provide a cost-effective way of encouraging compliance.
According to property tax accountant, Simon Thandi, details of property landlords advertising online will be compared with tax return information currently held by HMRC. Where it appears that a landlord has not declared all or some of their letting income, HMRC will most likely be issuing a nudge letter to the landlord. This nudge letter will include a request to complete a Certificate of Tax Position.
Whilst nudge letters will be issued on the basis of information harvested by HMRC, there are occasions where the information held is incorrect. Anyone receiving a nudge letter about short-term lettings should clearly check there is no question of mistaken identity! There will be occasions when this can happen e.g. in cases of having out-of-date information.
There are three potential responses to the nudge letter from HMRC:
The landlord has declared property income but not the full amount.
All the landlord’s tax affairs are up to date.
The landlord has not declared any property income.
A landlord who selects either option 1 or 3 will then be expected to bring their affairs up to date by making a disclosure. Landlords are asked to complete the Certificate within 30 days of receipt of the nudge letter. Upon receipt of HMRC acknowledging the Certificate the Landlord is required to calculate and pay any outstanding tax within 90 days using HMRC’s digital disclosure service.
If a Landlord chooses option 2 or does not respond, HMRC will likely decide to continue their own inquiries and test the information they hold. If HMRC subsequently discovers that there are likely to be undeclarations of property income the consequences are likely to be a lot harsher for the landlord. Once HMRC has decided that there is a case to answer they will open an inquiry using formal powers:
Schedule 18 Para 24-35 FA 1998- for companies
Section 9A TMA 1970 – Individuals.
These formal inquiry powers are supplemented by legal powers to demand the production of documents and information using Schedule 36 notices from the 2008 Finance Act.
Given that HMRC has the power to reduce penalties on unpaid taxes to take account of disclosure any landlord who initially denies any wrongdoing will face harsher financial penalties. Once HMRC has established under-declared letting profits they will seek interest and penalties. The penalties will include tax geared penalties which are based on a percentage of the tax underpaid. The difference between a concealed error and a fully disclosed error could well mean a 20% to 30% difference in a penalty charge, subject to the actual circumstances.
While in the majority of cases, HMRC settles their inquiries by collecting tax, interest, and financial penalties there is the potential for a different route in more serious cases. Where lost revenue is likely to exceed £500,000 the case is probably going to be dealt with by HRMC under Code of Practice 9 (COP 9). Dealing with COP 9 cases is specialist work and needs to be handled carefully. Failure to deal with COP9 cases correctly could lead to Criminal Prosecution.
Simon Thandi, UK Landlord Tax, said: "If Landlords receive a nudge letter, UK Landlord Tax is able to handle the calculation of outstanding liabilities and necessary disclosure to HMRC. Please contact us if you have any further questions regarding this subject, by getting in touch and speaking to one of our specialist tax advisers."
