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Key points * Story in The Times claims that 80,000 landlords are being targeted; HMRC denies there is any special crackdown. * Irrelevant reference to £4.1bn potential CGT bill and daily penalties. * Need for restraint from professional side in order to encourage 'fresh start' open dialogue with HMRC.
MY ONE COMPLAINT about the decision to drop the 'HMRC thinks' from the penalty provisions in the Finance Bill was that the clauses were tabled on a Tuesday. Whilst it was great to see the concerns of the profession listened to and acted on by HMRC and the Government, things that happen on Tuesdays or Wednesdays leave us at Taxation with the potential for egg on our face, because we go to press late on Monday. Thus we had a letter from a reader explaining why 'HMRC thinks' should be withdrawn appearing in the magazine after it already had been.
They did it with the 'offshore disclosure facility' as well: although we were sure enough to say that the announcement was coming when we went to press on the Monday before, HMRC's website was actually unveiled in all its glory on Tuesday morning. As in all these cases, we can update the story immediately online, and I would always advise readers to check our website for the latest news before acting, but isn't Monday as good a day as any for making big announcements?
Types to a waiting world
Last week, however, it was HMRC who had good reason not to like Tuesdays. Virtually the whole of the front page of The Times was taken up with a story headlined 'Thousands of buy-to-let families face tax shock'. The story was continued briefly on page two, with more shock-horror revelations splashed across the whole of pages six and seven, plus a leader article on page 16 for good measure, called 'Taxing Tolerance'.
What was the tax crackdown on which more than three pages of the The Thunderer's best verbigeration had been spent? Well, it seems that HMRC want to find landlords who are not paying tax on their rental income and make them pay up; and they also want to make sure that landlords only deduct the interest on their buy-to-let mortgages, rather than the capital repayments. So what was the relevance of this to the 'families' in the title? Your guess is as good as mine. The word 'family' does not appear in the story except for the front page headline, and the continuation headline on page two.
Hows and whys
HMRC's response was swift; there was no crackdown on landlords. They had simply:
'met with representatives of the accountancy profession … for their views on how we can best inform landlords of their existing obligation to report their property income to us and how we can help landlords to make accurate returns that don't require further work. This will benefit taxpayers and HMRC.'
Whilst we could not get any further information from HMRC, Taxation understands that the meetings were in fact an attempt to revive the interventions letters, but only after detailed consultation in workshops with advisers.
Mother feels so shocked
So what did the story reveal that justified the 'tax shock' headline? It claims that HMRC have identified 80,000 landlords who have either claimed too much tax relief or failed to declare either the rent received or a capital gain on the property. In fact that figure may well be an underestimate. According to the story in The Times, there are over 400,000 buy-to-let landlords in the UK, with over 800,000 properties bought with buy-to-let mortgages. However, according to HMRC just under 285,000 people in total are sent the land and property supplementary pages with their return. At first sight that would appear to suggest a shortfall of at least some 115,000 landlords, let alone those who are reporting but are incorrectly calculating the deductible interest. If the other widely quoted figure from Mintel of one million buy-to-let landlords is right, then the shortfall is far higher.
There may be other reasons why the figure submitting the land and property pages is so low, although there will also be plenty of people with property income that does not come from buy-to-let properties, but the raw figures at least bear out the reason for concern on the part of HMRC.
Chas Roy-Chowdhury is quoted in the article as saying that 'buy-to-let investors are generally not tax evaders'. It would be a mistake to generalise from the clients represented by accountants; by definition most taxpayers who are trying to evade tax don't appoint an agent. Whilst HMRC say that they do not believe the buy-to-let market to be any less scrupulous than other taxpayers, I would suggest that there is at least no reason to believe that they will be any MORE compliant. Whilst the comment from Chas is undoubtedly correct, it is too soon to conclude that the number of evaders is not large enough to warrant attention.
The story also rightly points out that only the mortgage interest can be deducted from the rental income, not the capital repayment. This is probably the area where unwary landlords could be forgiven for making a mistake. The supplementary pages only ever refer to 'interest' and do say that the costs of purchasing the property are not allowable, but do not spell out in the same paragraph that some of the monthly mortgage payment might be a capital repayment — it might be a good idea to do so in future.
The bullhorn crackles
That is, however, almost the last point in the main story which seems to have much merit. The 'campaign' is, according to The Times, 'the latest attempt to boost revenue for the Exchequer. Britain will have the biggest budget deficit in Western Europe next year'. Whilst inevitably the point of interventions is to make sure that those who are due to pay tax actually hand it over, there is no way that tax from 80,0000 landlords (even if it is the right figure) is going to make a significant difference to the budget deficit. In order to come up with a shockingly large figure of tax, the article quotes a calculation from specialist broker Landlord Mortgages that the total capital gains tax bill if every buy-to-let landlord sold their property today would be £4.1 billion. As other news media pick up on the story this is already being transmuted into 'Buy-to-let owners face £4.1 billion clampdown'. In fact, the figure is entirely irrelevant to the story of what tax may at present be underpaid.
The same is true of the comments about penalties. Whilst it is correct to say, as the article does, that they 'can reach the same value as the unpaid tax bill', we all know that in practice they don't. However, the front page story couples this with the accidental overclaim of mortgage interest point. It is left to an inside page article to explain that in that situation you are likely to get away with just having to pay the tax (and, although it doesn't say so, the interest).
The main story also mentions the £60 a day daily penalties for persistently late tax returns. What relevance does that have to this issue? The logic of the story is that either no return has been made and the landlord is evading tax, or a return has been made but with errors on it. In neither case is a £60 a day penalty going to be charged.
Daddy doesn't understand it
The leader item starts out with a reasonable, though by now well-worn, point about how easy it is to misunderstand the mortgage interest deduction, but rapidly descends from there:
'[The buy-to let] market would, though, face a severe blow if the taxman were to impose huge bills on part-time landlords, effectively turning what had previously been a profitable and socially useful investment into a criminal activity.'
Criminal? The only criminal thing here is the level of hyperbole employed by the leader writer. Let's get some perspective. Even if the full mortgage payments have been claimed rather than only the interest, the overclaim is probably going to be between £1,000 and £2,000 in most cases. For a 40% taxpayer even over six years and including interest that is going to be a total bill of around £5,000. Anyone who bought a property to let six years ago will be sitting on a substantial gain; if they need to increase the mortgage to pay the back tax that is unfortunate, but it is hardly the end of civilisation as we know it.
The leader writer seems to think that where a situation is 'confusing' HMRC should simply emphasise the correct position and make sure the right amount of tax is paid in the future. But tax is full of far more complex and confusing issues than this, and HMRC's guidance does clearly state that you can only deduct the interest. Whilst it is an understandable mistake for taxpayers to make, it is still a mistake, and to allow landlords who have made it to avoid paying the tax that is due is to penalise the landlords who took the time and trouble (and perhaps paid for professional advice) to get the calculation right. 'It is, of course, the Revenue's duty to prevent evasion' the leader graciously concedes. Rather more than that; it is their duty to ensure that people pay the right amount of tax as set out by the law, and that includes landlords who haven't read their guidance notes carefully enough.
Ain't so peachy keen
The real danger from this story is not what might happen to buy-to-let landlords, it is what might happen to the fledgling 'new start' from HMRC in their relationship with the profession. Despite a lot of well-placed people telling me that things really had changed, I was still somewhat sceptical until the change to 'HMRC thinks', but I am now convinced that there is substance to it. It would, however, be very easy for HMRC to retreat into the bunker if things don't work out, and this is a prime example of how some in the profession could be responsible for that.
Although we strongly criticised interventions last year because of the way they were introduced, there is nothing wrong with them in principle. Indeed, they arose from a joint concern between HMRC and the profession that there was no way of handling issues which did not merit a full enquiry but where there was known to be a likelihood of an error. There clearly is a problem with the capital element of mortgage payments being deducted, and HMRC is doing the right thing in trying to reach agreement with advisers on the best way forward.
However, if we want HMRC to be transparent and open with us, we need to respect the nature of those discussions. Somebody has passed on the content of the meetings to The Times. Whilst our understanding is that they were not intended to be confidential, I can still see no reasons, because there are no reasons, for having done so. At this point the issue is only really of interest to, and certainly only capable of being properly understood by, the profession, and it was at the very least naïve to talk to the press in a way which allowed them to scaremonger like this. If we want the dialogue to continue transparently with HMRC then we all — professional press included — need to resist the opportunity to score cheap points. That does not mean holding back robust criticism where it is valid, and I am sure we will be back to excoriating HMRC failings in future issues of Taxation. But what they were doing here was right, and they have been badly let down.
