LETTING & ESTATE AGENT

HMRC’s Property Income Task Force (Part 2) - When the Tax Man Comes Calling...

HMRC’s Property Income Task Force (Part 2) - When the Tax Man Comes Calling...
On 31 May 2012, HM Revenue & Customs (HMRC) announced six new “task forces” to deal with cases of suspected tax evasion in certain business sectors, in specified locations (see also ‘HMRC’s Property Income Task Force (Part 1) – Anything to Declare?’.

 

One of those task forces is concentrating on property rentals, in the following areas:


• East Anglia
• London
• Leeds
• York
• Leicester
• Nottingham
• Lincoln
• Durham
• Sunderland

 

What are the Task Forces?


The task forces comprise several teams of dedicated tax officers with specialist training. Some of the tax officers will be selected from corresponding local tax offices, to assist with ‘local knowledge’. The task forces will operate simultaneously in different locations.

 

How will they work?


The task forces will initiate contact with persons whom they suspect of failing to declare income. Depending on the circumstances, this contact may be by way of letter, or a visit to the premises – for most landlords, this will mean their home (See below). There may be follow-up visits and almost certainly further correspondence as the cases progress.

 

How long do they take?


The initial contact phase will last for no more than a few weeks – the task forces don’t necessarily contact all of the targets immediately, simply because of the numbers involved. The follow-up phase – correspondence, raising assessments, etc. – should take no more than six months.

 

What are they targeting?


It is important to bear in mind that these task forces’ sole focus is on cases of suspected tax evasion – in other words, deliberately failing to account for all taxable income, or deliberately over-stating deductions or reliefs.

 

In the context of landlords, the focus will almost certainly be on the failure to disclose any, or all, property income.

 

Two points follow as a consequence:


1. These are what HMRC likes to call ‘fast-tempo’, high-intensity activities: they are not intended to be the long, drawn-out enquiries with which many taxpayers and their agents are familiar; rather they will be looking to raise assessments, charge interest and penalties and move on to the next case in short order. In some respects this is understandable, since it should be relatively straightforward to establish if someone has not been paying the tax he or she should.

 

2. People on the receiving end of a task force visit/enquiry should expect ‘short shrift’ from the tax man: HMRC is looking for people guilty of the worst kinds of tax ‘abuse’ and will be treating people accordingly. If we put it in terms of ‘good cop/bad cop’, this is most definitely the ‘bad cop’ side of HMRC.

 

Is that fair?


It would be easy to say that tax evaders are getting what they deserve and, in some cases, it might be appropriate to leave it at that. However, HMRC has a duty to treat all people fairly and, particularly in such circumstances as these, not to assume that everyone on their list is a tax evader or work on the basis that they are ‘guilty until proven innocent’!

 

It is worth bearing mind that HMRC’s Charter (see www.hmrc.gov.uk/charter/charter.pdf) requires them to ‘treat people as honest’, and to ‘treat people even-handedly’. The Charter should still be followed, even here.

 

HMRC’s “Profit Motive”


HMRC might not appreciate the point being made so simplistically but they have a definite self-interest in making sure that they achieve the greatest amount of additional tax, penalties and interest (and publicity if possible) from these task forces. They have been allocated £917 million as an ‘investment’ (suspended budget cuts in reality) and are determined to prove that they can achieve the promised returns on that investment (£7 billion a year by 2014/15). The task forces are a relatively modest – but high profile – component of that spend.

 

What’s the worst that can happen?


In the worst cases of tax evasion, the consequences can be very severe:


• Penalties of up to 100% of the tax found to have been underpaid;
• Going back to collect up to 20 years’ tax lost plus interest;
• Publication of a person’s identity (‘naming and shaming’) – broadly if the recent tax loss exceeds £25,000; and
• Criminal prosecution.

 

It is perhaps worth mentioning that whilst criminal prosecutions are still very rare, HMRC has set itself the task of a five-fold increase from 2010. (Nevertheless, the target is of the order of 1,000 cases).

 

Where does HMRC get its information?


HMRC does not divulge specific details of its information sources. However, it is understood that information in relation to property ownership is derived from:


• The Land Registry
• Letting agents
• Insurers
• Council Tax / Housing Benefit offices

 

HMRC is legally empowered to require relevant information from third parties, such as banks, websites, etc., that might hold details of let properties and their owners.

 

Past experience and future expectations


HMRC’s first ‘ghost landlord’ task force venture was in November 2011 and targeted the North West. Details are scant but so far, it has been reported that three cases have been adopted for “Criminal Investigations” – i.e. for potential criminal prosecution.

 

It is understood that these task forces will focus on landlords who own and/or rent at least three properties; also that they will be targeting approximately 200-300 cases in each region.

 

Whilst the official press release announced the expected tax recovery to be around £17 million, I have heard that HMRC is hopeful of £20 million – most of this, of course, from the London region.


It is also expected that these property rental task forces will continue for some time yet, moving from one region to the next until the tax ‘yield’ is no longer cost-effective.

What should I do if HMRC contacts me – or knocks on the door?


It is to be hoped that most contacts will be initiated by letter but here are some pointers if the taxman visits in person, in the context of a task force initiative:


• HMRC has the power to enter “business premises” where reasonably required for the purposes of checking a person’s tax position, to inspect – but not to search – the premises, business assets and business documents.


• Bearing in mind that most landlords’ place of business will be their homes, it is important also to bear in mind that HMRC has no powers to enter or inspect any part of the ‘premises’ used solely as a dwelling. (So he can inspect a room used as an office).


• Most importantly, you can refuse right of entry if you wish. Furthermore, even if you have granted access, you are still entitled to require the officer to leave the premises at any time, without explanation.

 

Practical Tip :


Whether dealing with the taxman by letter or in person:


• Professional advice is strongly recommended.


• You are entitled to be treated in accordance with HMRC’s Charter. This may be particularly relevant if an innocent error has occurred, rather than (or alongside) deliberate evasion.


• Assisting the tax officer in his enquiries should significantly mitigate the extent of any penalties – if income has been omitted, full disclosure is advised.

 

Of course, if there are concerns that tax may have been underpaid, it makes sense to take action now rather than wait for HMRC to get in touch!

 

Lee Sharpe