I have received a letter from HMRC and think it may be trying to tell me that I have underpaid my tax. I have two properties that I rent out and I’m fairly certain I have paid my tax correctly – and have been doing so for years.
At first I thought it was a scam. But having double checked, I can see that it definitely isn’t fraudulent.
The letter begins as follows: ‘We are writing to you because you are, or have been, a landlord who lets property.
Our reader has received a letter from HMRC which they think suggests they may not have told the tax authority about all of their rental income
‘Our information shows that you have put a deposit in a ‘Tenancy Deposit Scheme’. We have compared this information with what you have told us on your Self Assessment (SA) tax return for the year ending 5 April 2021.
‘Our comparison suggests you may not have told us about all of your rental income.’
So does this mean HMRC is now using data from the Tenancy Deposit Scheme as a tool to target landlords who they suspect to have underpaid tax on their rental income?
And do I actually owe anything or has this letter been sent out to all landlords?
Ed Magnus of This is Money replies: First and foremost, it’s great that you checked to see if it was a scam. Fraudsters are constantly attempting to mimic HMRC in a bid to fool people.
It’s always worth cross-referencing any letter you receive from HMRC with any previous communication you have on file.
It’s also worth checking any postal or website addresses included within the letter, as well as any phone numbers. Compare these against the official numbers as shown on the HMRC website.
HMRC’s main contact details can be found on its website. Although it doesn’t list all of the numbers it might share with someone in a letter.
You may also want to add ‘Do not trust caller ID’ on phones as numbers can be spoofed. If in doubt, you can contact HMRC directly to double check – just make sure you use an email address or phone number from its official contact list.
URLs starting with www.gov.uk will always direct to official Government department websites.
It’s also important to remember that no HMRC letter, email or text will offer unexpected tax rebates or refunds.
Could it be a scam? It’s always worth cross referencing any letter you receive from HMRC with any previous communication you have on file
As for the letter you received, it appears to be genuine. HMRC is indeed using a database obtained from the Tenancy Deposit Scheme to contact landlords about paying the correct amount of tax.
It forms part of HMRC’s Let Property Campaign, launched in 2013, which encourages buy-to-let landlords to voluntarily disclose any undeclared rental income and offers an opportunity to address any previous errors.
According to analysis by the accountancy firm UHY Ross Brooke, the campaign generated an additional £17.7m in tax revenue last year.
Any landlord that makes a full and voluntary disclosure in these circumstances can usually expect a lower penalty than HMRC would normally charge if the tax authority were to raise an enquiry or compliance check itself.
The Tenancy Deposit Scheme is one of three Government-approved deposit schemes in England and Wales that hold the deposits of tenants for the duration of their tenancies.
The other two are called the Deposit Protection Service and My Deposits. In Scotland and Northern Ireland there are separate deposit schemes.
The Tenancy Deposit Scheme data simply tells HMRC which customers have received rental deposits and therefore in all likelihood will have also received rental income.
However, that’s about as far as it goes. The data does not provide HMRC with an actual snapshot of how much rent has been received by each landlord.
The letter should be deemed as an educational prompt for those who rent out property, to ensure previous tax returns are correct.
Although the letter seems alarming, HMRC says it isn’t intended to accuse anyone of deliberately evading tax.
>> What’s in store for UK buy-to-let landlords in 2023?
It might seem alarming, but HMRC says its letter is simply a reminder for landlords who may owe tax to make sure their affairs are up to date
The same letter to landlords also tells them they might owe HMRC capital gains tax if they recently sold a rental property.
Once again this is a prompt rather than an accusation of any tax evasion.
The scheme is one tool HMRC has for identifying landlords. It can also use data from council tax bills, the Land Registry and estate agent listings.
How to take part in the Let Property Campaign
To take part in the Let Property Campaign landlords need to get in touch with HMRC.
They will then need to disclose any income, gains, tax and duties they have not previously told it about.
Landlords will also need to make a formal offer stating what they believe it is fair for them to pay, and help HMRC as much as they can if it asks them for more information
When assessing the reduced penalty offer, HMRC will take account of the level to which they have helped its enquiries and the accuracy of the information provided.
What’s in it for landlords?
If you have paid less tax than you should due to misunderstanding the rules or deliberately avoiding paying the right amount, it is better to come to HMRC and admit any inaccuracies rather than waiting until HMRC uncovers those errors.
There is no disclosure ‘window’ requiring you to disclose what you owe by a specific date, but landlords risk higher penalties if they become subject to a full enquiry and have not already notified an intention to disclose.
When landlords make a disclosure they can tell HMRC how much penalty they believe they should pay.
What they pay will depend on why they have failed to disclose their income.
If they have deliberately kept information from HMRC they’ll pay a higher penalty than if they have simply made a mistake.
HMRC’s Let Property Campaign encourages buy-to-let investors to voluntarily disclose any undeclared rental income
They may not have to pay any penalty at all, but if they do it is likely to be lower than it would be if HMRC found out they had not paid enough tax of its own accord.
If they cannot afford to pay what they owe in one lump sum, depending on their circumstances, they’ll be able to spread their payments.
If they completed previous tax returns, but made careless mistakes when declaring their income, they only pay for a maximum of six years — no matter how many years they’re behind with their tax affairs.
However, if they do not come forward and HMRC finds later that they’re behind with their tax, it may be harder to convince them that it was simply a mistake.
The law allows HMRC to go back up to 20 years and in serious cases HMRC may carry out a criminal investigation.
What if undisclosed rental income is kept secret?
Landlords who fail to disclose their rental income may feel confident that they will get away with it. However, dodging the taxman may come back to bite them.
If HMRC suspects landlords have not declared all their rental income it can carry out compliance checks or enquiries.
Any landlords involved will not then be able to make use of the opportunity offered as part of the Let Property Campaign, and will usually be charged higher penalties.
The penalties could be up to 100 per cent of the unpaid liabilities, or up to 200 per cent for offshore-related income.
In extreme cases HMRC may consider the instigation of a criminal investigation, in line with its criminal investigation policy.
