How to prevent unwanted attention from the taxman
In the March 2009 Budget speech Mr Darling said with regard to tax “I am determined to continue our successful drive to prevent avoidance and evasion.”
From one angle of the 2009 Budget Mr Darling increased the interest in property purchase at the lower end of the market. He said, “I will double the stamp duty limit for first-time buyers from midnight tonight from £125,000 to £250,000 for this year and next.” This action is pitched against the fact that HMRC are trying to increase the HMRC “tax take” on amateur property speculators.
Sophisticated software means HMRC can “interrogate” the Land Registry database more efficiently than say five or ten years ago, and their access to websites etc. is much greater. With the increased penalty system for HMRC enquiries from 1 April 2008 and 2009 there is the potential for taxpayers who are at fault to be caught with not just uncollected tax but also penalties thereon of up to 100%. There will be interest payments on unpaid tax as well.
What Should I Do?
If any taxpayers have concerns on undisclosed property or gains then they should disclose now rather than HMRC discover at a later stage. Professional advice should be sought. HMRC’s compliance handbook provides examples of “deliberate but not concealed” inaccuracies.
The new penalty system is “behaviour based” so disclosure of undisclosed income and sales from property at an early stage is important. It could be that expenses exceed the income, e.g. mortgage interest and by the time the correct calculation is made there will be very little extra tax and penalties to collect. Some property transactions can be deemed to be taxed as “trading” as opposed to “capital”, i.e. subject to income tax.
Further to the consideration of property transactions becoming caught as trading income and not being caught as capital gains, property developers (including amateur property owners) are usually caught under the terms of legislation (ITA 2007 s 756) which encompasses cases where: ‘land is developed with the sole or main object of realising a gain from disposing of the land when developed’. The aim of this section of the Taxes Act is for HMRC to prevent property dealing profits being treated as capital. This could result in income tax being collected at 40% or 50% as opposed to the capital gains tax rate of 18%.
The scope of ITA 2007 s 756 is broad and catches transactions which have little or no element of artificiality; therefore the avoidance can be accidental or unwitting by the property or landowner. There could be everyday property owners who will be caught by these provisions. Another area of HMRC attack is undeclared rental income from second homes or a buy to let portfolio. Often the mortgage interest etc. can exceed income but the existence of the income still has to be declared.