In December 2013, HM Revenue & Customs launched yet another of their come clean campaigns aimed at errant landlords who should have declared their rental income for tax but for whatever reason didnt!
This is meant to run for 18 months until June 2015 and offers attractive (if that is the right word) discounts on penalties for failing to file a tax return. You might even get away with no penalty at all if you can convince them that you took reasonable care although this is unlikely in the case of landlords failing to pay tax.
The best you can hope for is 10% of the tax due if it was just a careless error, which may well be the case if you genuinely didnt know that you had to pay tax on rental income. However, even those who did know but just forgot to get round to it can get away with 20%.
This might seem high, but not as high as the taxman could charge if he finds you first. Penalties for deliberate inaccuracies range between 35% and 70% for prompted disclosures, depending on the degree of cooperation given. Even for an unprompted disclosure (whereby you tell them before they start asking questions) it is unlikely you would get the minimum penalty of 20% unless you use the Let Property Campaign.
It must be emphasised that you have to make an offer to pay a certain amount of tax under this campaign, and if that offer turns out to be too low, you will lose all the benefits of coming clean. It is imperative that you work out the tax properly, and also the interest for paying late (there are helpful calculators for this but you have to enter the right dates and amounts).
There may well be costs for running a rental property that you are unaware you can claim. Equally, there may be costs that you think you can claim but cant. Capital allowances are a good example. Residential landlords cannot claim for any moveable goods inside the property, such as furniture. You also have to know the difference between maintenance and improvement costs.
It is important to pro-rata rent and expenses over the tax year too. You cannot just do it on a cash basis. Plus you have to treat tenants deposits and dilapidation fund payments properly.
If you are unsure how to calculate your tax bill, it is best to consult an expert. We have many small landlords on our books. Come and see us if you need any help or advice.
Many small landlords only become aware of tax issues when they are about to sell the property and someone tells them about Capital Gains Tax. This may be a lot less than you think, especially if you once lived in the property.
Please come and speak to us if you are a small landlord facing all this for the first time. No need to deal with the taxman alone. We can make a good case on your behalf and handle all calculations and correspondence with HMRC.