Normally the obligation to deduct tax falls on a letting agent. Where the scheme applies and the property is let through a letting agent, the letting agent must register with HMRC, deduct basic rate tax from the rent that they collect and pay the tax deducted to HMRC on a quarterly basis.
However, where there is no letting agent, the obligation to deduct tax under the scheme may fall on the tenant. A tenant of an overseas landlord must operate the NRLS if the rent paid to the landlord is over £100 a week and the tenant:
pays the rent direct to the landlord;
pays the rent to a person outside the UK; or
pays the rent to a person who is not a letting agent in the UK.
In some cases, HMRC will instruct the tenant to operate the scheme, even though the rent is less than £100 per week.
Where the tenant falls within the scheme, he or she must work out the tax that needs to be deducted from the rent, deduct the tax before paying the rent to the landlord and pay the rent that has been deducted over to HMRC on a quarterly basis.
The tax is applied to the net rent payable to the landlord after deducting amounts paid at the landlord’s direction for things such as cleaning, gardening and minor repairs. Tax is deducted at the basic rate of tax (currently 20 per cent).
Thus, if tenant within the NRLS pays rent of £1,000 a month and in a particular month incurs costs on behalf of the landlord of £100, tax is payable on the net rental income of £900 at a rate of 20 per cent. The tenant must therefore deduct £180 before paying the balance of £720 to the landlord.
The tenant must account for tax quarterly on form NRLQ and pay it to HMRC. The quarters run to 30 June, 30 September, 31 December and 31 March. The tenant must also complete an annual return (form NRLY) by 5 July for the year ended on the previous 31 March.
It is important tenants understand and comply with their obligations under the scheme as they may be liable to pay the tax themselves if they fail to deduct it and pay it over to HMRC.
Further details on tenants’ obligations under the NRLS are available on the HMRC website.