Disclosing property income via the Let Property Campaign
Written by Ray Coman
The let property campaign is a facility to notify HMRC about previously undisclosed tax liability on rental income. A separate disclosure facility is available for the taxpayer to come forward with other types of income. The let property campaign facility enables taxpayers to make a voluntary notification to HMRC of rental profits. In some cases, the declaration will be prompted.
When a Tax Return is used instead of Let Property campaign notification
Tax years which are not covered by the Let Property campaign
Procedure for making a declaration of previously undisclosed property income
Calculating tax liability to report via the Let Property Campaign
Self-assessing penalty due on tax arising from Let Property income
Calculating interest on tax and penalty arising from the let property campaign disclosure
Claim for overpayment relief has to be made separately
The number of years covered by the let property campaign
When a Tax Return is used instead of Let Property campaign notification
A taxpayer has until 5 October following the end of the tax year to notify HMRC about liability to tax. While this is the official notification deadline there is no adverse implication if the Return is filed by the filing deadline. The filing deadline is 31 January following the end of the tax year or three months after the notice to file has been received by HMRC, if later. Given it will usually take HMRC three weeks to post a taxpayer reference number, it is prudent to register by the end of December.
Late notification penalties apply where there is a tax liability. The penalty rate is 0% where the tax is less than 12 months due. The tax payment deadline is 31 January after the end of the tax year. Therefore, a Tax Return could be used where there is no late payment penalty arising on income. Furthermore, if there is no rental profit for a tax year, the tax liability and therefore penalty will also be nil. While filing a Tax return for preceding years is an alternative, the Let Property Campaign form is simpler, because it does not include other income which has probably already been assessed to tax.
Tax years which are not covered by the Let Property campaign
It is not possible to include information in a Let Property Campaign disclosure for any tax year (from 2016/17 inclusive) in which the Return is not yet filed. Therefore prior to 31 January the most recently passed tax year cannot be included in the disclosure form. Furthermore, any tax year (from 2016/17) for which a self-assessment form has already been issued cannot be included on the let property campaign form.
Procedure for making a declaration of previously undisclosed property income
The first step in the process is for the taxpayer to notify HMRC of intention to file. On receipt of the notification, HMRC will despatch a let property campaign disclosure reference number. The number should be used to file the disclosure. HMRC will also provide a payment reference number and payment link, and these details rather than the usual taxpayer payment methods should be followed. At some stage, an agent can be engaged in the process for preparing the form and HMRC provide a facility for tax agents to submit the disclosure on behalf of their client. One disclosure per person is required even for jointly owned property.
Calculating rental profits
The calculation of rental profits is broadly income less expenses. However, the following should be taken into consideration when reviewing prior years:
- Different rules apply in preceding years on the deductibility of mortgage interest from taxable profits. Transition arrangements apply for the tax years 2017/18 to 2019/20 inclusive.
- The wear and tear allowance abolished from 2016/17 would be available for furnished property prior to that date.
- Certain furnished holiday lettings and buildings in multiple occupation will be entitled to capital allowance for fixtures and fittings and for any equipment used in the building.
- An improvement is deducted from the cost of the property in the calculation of eventual gain on disposal. A repair is deducted from taxable profits.
- Where expenses exceed income for a given tax year, a loss will arise. Loss can be carried forward and set against income of a future tax year which is part of the let property campaign disclosure. Any losses carried forward on the most recent tax year which is part of the campaign will be brought forward on any subsequent Tax Return filed by that taxpayer.
- Accountancy fee for the preparation of the let property campaign is a tax-deductible expense.
Calculating tax liability to report via the Let Property Campaign
It is only tax arising on rental profits which are assessed in the let property campaign.
Any incorrect amount of tax deducted at source from employment or pension earnings, will be addressed the PAYE department of HMRC. For instance, if too little tax is deducted at source, the taxpayer should receive a communication from HMRC requesting the additional tax. Typically, the additional tax is collected via an adjustment to the tax code (and thereby tax collected at source from employment earnings) in a future tax year. If too much tax has been deducted at source, the taxpayer should receive a refund payment from HMRC.
As previously explained, if the taxpayer has previously filed a Tax return, the previously undisclosed income is included in that Tax Return. It is possible to make an amendment within 12 months of the filing deadline. For earlier years it will usually be necessary to submit a paper Tax Return to HMRC. If the taxpayer has been sent tax returns but is late, the rental profits are simply added to those assessments and filed in the normal way.
The penalty applied to voluntary disclosure of late paid tax via a Tax Return is the same for the Let Property Campaign.
Tax that arises on rental income is the only tax to be included in the disclosure. Tax with the rental income is compared to tax without the income. The difference is tax payable. Other income and any related tax deducted at source is not included on the Let Property Campaign disclosure form.
Self-assessing penalty due on tax arising from Let Property income
The rate of penalty will depend on the lateness of the notification and behaviour of the taxpayer.
In certain circumstances, a reasonable excuse can be used to reduce the rate of penalty. Reasonable excuse includes family bereavement and ill health, which will usually need to be evidenced by medical records. A reasonable excuse does not include ignorance about the system or not receiving a notice to file from HMRC. A taxpayer is required to file a Tax Return if required to do so, regardless of whether any such notice has been issued by HMRC. Keep in mind an illness could need to be chronic and severe to cover a lengthier period of disclosure. Reasonable excuse is rare for multi-year cases.
Typically, the taxpayer will admit to carelessness as the reason for late notification. The very voluntary nature of the disclosure stands in favour of claiming the omission was not deliberate; and negates any argument that it was concealed. If applicable, it is prudent to point out in the disclosure that the reason for lateness is not any deliberate attempt to conceal income.
If the taxpayer has come forward unprompted by HMRC, but has been careless, and the tax is less than 12 months late there is no penalty. Where the above applies and the tax is more than 12 months late, the penalty rate is 10%.
Higher penalties apply where the reason for the error was deliberate or where it was deliberate and concealed. In most cases, especially where the disclosure if unprompted a taxpayer will typically wish to maintain that there was no evasive intent.
In cases where HMRC have prompted the individual, the rate of penalty could be 100% of tax owed for onshore income and 200% for offshore income. These penalty rates -highly punitive- are being applied in practice.
The rates provided in this report are the lowest percentages available and therefore the percentage that would typically be self-assessed as a starting point. HMRC has the power to increase the rate of penalty for failing to tell, help and give accounting records and explanations. This could occur for instance:
Where the taxpayer is late or unforthcoming with requested information;
Where the tax year is already subject to an HMRC enquiry.
In addition to higher penalties, HMRC can also make public cases in which the taxpayer has been penalised. Provided there is cooperation, and the disclosure is complete and correct, HMRC has stated that it will not publish the disclosure.
Calculating interest on tax and penalty arising from the let property campaign disclosure
The rate of interest charged on late paid tax has varied over the past 20 years. However, in general it has ranged around 3% per annum. Fortunately, HMRC provide a calculator. It is, therefore, only necessary to input the tax and penalty amounts, and the date that the liability will be paid to HMRC. To err on the side of caution, a taxpayer could base interest calculation on a date several days or even weeks after the expected payment date. However, this could lead to the disclosure form being rejected and having to be re-submitted. The HMRC software cannot accommodate wide variance in interest calculation between the declared and actual payment date. It is therefore prudent to decide the payment date in advance, say 20 days from submission of the report, and to make the payment accordingly.
Claim for overpayment relief has to be made separately
Often the decision to make a Let Property Campaign disclosure has been prompted by a historic review of tax affairs. Possible repayments could also transpire from this process. The repayment could arise for instance on tax withheld at source by the letting agent under the non-resident landlord scheme. Such claims for overpayment relief must be made separately from the Let Property Campaign. There is no mechanism for obtaining a repayment via the Let Property Campaign disclosure form.
The number of years covered by the let property campaign
There is no limit to the number of years in which previously undisclosed letting income must be reported. HMRC have stated that if a taxpayer makes a prompted disclosure, has registered for self-assessment, taken reasonable care and filed Tax returns on time, it will only be necessary to pay tax for a maximum of six tax years. By contrast, if the letting income results from a prompt made by HMRC, the tax office can request details of letting income up to 20 years in the past.
