HMRC have been pretty lenient with business owners during the Covid crisis; but in the last few months, they’ve renewed their commitment to carrying out regular ‘enquiries’ into suspicious tax returns.

As a landlord, how can you avoid triggering a HMRC enquiry into your property investment business? We’ve provided a few tips below – but first…

What is an HMRC Enquiry?

Also known as an ‘HMRC investigation’, an HMRC enquiry is an audit into your business affairs to ensure you’re paying the right amount of tax.

The complexity of an investigation can range from a basic ‘aspect enquiry’ (where HMRC queries a small part of your tax return) to a ‘full enquiry’ (where HMRC examines the whole tax return as well as your accounts and records).

If you’re subjected to an enquiry, you’ll receive a letter from HMRC asking for more information. You’ll likely need to send them copies of your business records, and they may also want to arrange a meeting with you.

For most property investors, enquiries are nothing to worry about. In fact, HMRC conducts a number of random enquiries each year to make sure they’re getting it right.

However, even if you’ve done nothing wrong, an enquiry can still be time-consuming and stressful for your business. Most enquiries take around twelve months to complete, but it’s not uncommon for investigations to drag on for years.

And if the enquiry finds that you’ve underpaid on the amount of tax you owe, you’ll need to pay it back with interest reaching back to the date when the tax was owed; plus additional financial penalties and even potential jail time if you’re found to be purposefully evading tax.

Fortunately, avoiding some of the common ‘triggers’ for HMRC enquiries can significantly reduce your chances of being hit with an audit.

Keep up with your tax deadlines

Imagine you’re the computer system at HMRC. 

Your institution receives millions of self-assessment filings every year. There’s no way your investigation staff can review every single business; so instead, you select a sample of businesses to be investigated each year.

Now imagine two landlords: 

• Landlord A has submitted their self-assessment and tax return before the January 31st deadline year after year. 
• Landlord B has submitted theirs late on several different occasions.

Which one would you rather include in your sample of businesses to be investigated?

Put simply, it’s best to submit your tax returns on time every time. If you’re constantly filing yours late, the taxman may suspect that you’re failing in other areas of tax compliance too.

Keep up with record-keeping

Staying organised and up-to-date with your business records is vitally important. 

It won’t necessarily prevent you from being selected for an enquiry by HMRC’s computers; but it can help you deal with an investigation much more efficiently. 

You’ll be able to supply HMRC with all the information they need, your records can jog your memory about any transactions they might find suspicious, your records might clue you into a mistake you’ve made on your self-assessment (in which case you can let HMRC know about the error) and you’ll likely acquire a greater awareness of how your business is performing in general.

If you’re unable to provide the records that HMRC requests, you could face penalties and their investigation could progress from a simple aspect enquiry to a full investigation. 

And without records, you’ll likely find yourself struggling to answer any of their questions about your business.

Be sure to keep copies of all your customer invoices, receipts, bank statements and any other documents which are relevant to your company accounts.

Double-check before submitting

Let’s face it; you probably didn’t get into property investment for the tax paperwork.

Keeping records and filling in self-assessment forms can get monotonous very quickly. It’s all too easy to miss swapped digits or an extra zero here and there.

If you’ve left yours till the last minute, it’s also easy to omit important elements from your return in your rush to complete it; such as your capital gains (and therefore capital gains tax liabilities) from sold properties.

And without a dedicated tax advisor overseeing your accounts, your business could be making simple compliance errors based on outdated practices. 

For example, many independent landlords still attempt to claim back mortgage interest (despite full relief being phased out in recent years for all but limited company landlords https://www.gnsassociates.co.uk/mortgage-interest-tax-relief-for-landlords/ or property improvement costs (despite the fact these are capital expenses, which can’t be deducted from your taxable rental income).

Once you’ve filled out your return, you and your accountant should both review it in full before you submit it to HMRC. 

Make sure everything that needs to be included has been included, and check that all the numbers are correct.

Provide more info if necessary

Ordinary transactions can sometimes appear suspicious when they’re presented in cold hard numbers.

HMRC’s computers are good at identifying financial discrepancies, but not so great at reading context. That’s why an HMRC officer will take the self-assessment returns that the computer flags up and review them with a human eye.

Self-assessment forms offer an ‘additional information section (also known as ‘white space’) where you can add notes, contextualise any unusual transactions, and disclose any additional income and/or reliefs.

But for property investors, when is a white space note actually necessary? 

This is where hiring a specialist property accountant can really help you out. They’ll be able to review your accounts, advise you on which transactions might be flagged up by HMRC’s computers, and provide explanations in the additional info section in plain English.

Settle your tax via the Let Property Campaign

What if you’ve never paid the taxes you owe on your rental income? Or you’re aware of a mistake on a previous tax return, but you’ve kept it quiet ever since?

If HMRC have already started an enquiry into your property business, it may be too late. But if you’re lucky, HMRC may send you a Let Property Campaign letter before they send you an enquiry letter.

The Let Property Campaign aims to get more landlords paying their taxes. It’s an amnesty of sorts; offering an opportunity to admit to underpaid taxes, calculate what you owe and settle your outstanding tax bill in return for less severe penalties. 

Keep in mind, you don’t have to wait to receive a letter to take part in the campaign. 

Again, a specialist accountant can work wonders here. They can provide assistance with calculating your tax and interest costs, as well as filling any major gaps in your business records.

GNS Associates offer specialist property tax advice, HMRC investigation support and Let Property Campaign guidance to help landlords take control of their taxes. Let’s see how we can help your property investment business – call our team on 0208 090 2604 or email info@gnsassociates.co.uk to arrange your consultation today.