Landlords evade quarter of tax on rental income, figures reveal

HMRC plans crackdown as buy-to-let and other private landlords evade £550m a year

By Steve Lodge | 14 November 2012

“Lettings are a key area where we are losing money… This is an area where people try to cheat us” – HMRC spokesman

Buy-to-let and other private landlords are evading a quarter of UK tax due on rental income, Exaro can reveal.

Tax evasion by people who do not declare income from rental properties has soared to at least £550 million a year, according to an estimate by HM Revenue & Customs (HMRC).

This compares with £1.8 billion of tax collected on rental income declared by landlords. This means that the tax really due is £2.35 billion, but more than 23 per cent of this is evaded.

HMRC told Exaro that landlords who fail to declare rental income were “ripe” for a crackdown.

John Whiting, director of tax policy at the Chartered Institute of Taxation, said that the widespread tax evasion by landlords as revealed by the figures is “very significant”.

He suggested that non-payment totalling a quarter of tax liabilities is a level of evasion that might normally only be expected in the worst “cash businesses”.

“Clearly, rental income is an area where HMRC needs to pay more attention,” he said. “On this scale, it is serious tax evasion.”

The figures are for the 2009-10 tax year, the latest available from HMRC for tax paid on rental income and the amount evaded. The estimate of £550 million evaded was buried in an HMRC report last month measuring the UK’s “tax gap” of uncollected liabilities. It is nearly four times HMRC’s previous estimate of £142 million of unpaid tax on lettings in a year.

And the amount evaded is likely to be higher because the estimate only covers landlords not filing a tax return – typically people in staff jobs and pensioners.

HMRC estimates that individuals who file tax returns under the self-assessment system, which covers self-employed people and many high earners, evade a further £400 million of tax in a year. This evasion, however, covers not only lettings, but also other income and investments.

In addition, HMRC sees £550 million as a “lower limit” for evasion by landlords outside self-assessment because third-party data used to compile the estimate may be incomplete.

An HMRC spokesman said: “Lettings are a key area where we are losing money.” HMRC was turning its attention to evasion by buy-to-let and other private landlords, he said. “This is an area where people try to cheat us.”

Private landlords include people who take in lodgers, and owners of properties used for holiday lettings. They also include so-called ‘accidental landlords’, people who are unable or unwilling to sell their properties in a depressed market and turned to letting them until prices rise.

In May, HMRC launched a “taskforce” to target “highest-risk cases” of tax evasion by landlords in London, East Anglia, Leeds, York and certain other towns and cities. These cases included properties owned through offshore arrangements.

However, that initiative was expected to recover only £17 million in unpaid tax.

The spokesman said that a crackdown next year was likely to set out a ‘tax amnesty’, which offers reduced penalties for people who come forward willingly to settle unpaid liabilities.

Recent HMRC amnesties have included savers with offshore accounts.

Tax inspectors are likely to target potential evasion by landlords by using records at the Land Registry to find individuals who own more than one property.

But tax specialists pointed to the difficulty in tracking down undeclared rental income from some lettings, for example where a couple moved in together and let out one of their flats to friends.

The Chartered Institute of Taxation’s Whiting said that while HMRC had become better at identifying people who might be receiving undeclared rental income, it had been a “little behind the curve” with the boom in the buy-to-let market.

HMRC figures show that there are more than 1.9 million private landlords in the UK. But there is no official estimate on how many landlords evade tax.

In addition, as Exaro revealed in September, buy-to-let landlords save more than £2 billion a year in tax by offsetting mortgage interest against rental income.

HMRC told UHY Hacker Young, the accountants, in response to a request under the Freedom of Information Act, that individuals declared rental income of £23.8 billion in 2009-10. And they paid £1.8 billion tax after deducting expenses – such as property repairs – of £13.3 billion.

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