JOURNAL 46

SHOULD LANDLORD’S BE EXCUSED PAYING TAX?

The Times used to pride itself on being a paper of record, one on which in the future historians could rely for accurate reporting of events. Since it went tabloid it appears to have adopted the philosophy of “never let the facts get in the way of a good story”.

The story that caught my eye was a recent three page (one front and two full inside pages) feature penned by two different reporters, which was headlined “Thousands of buy-to-let families face tax shock”. Even this headline seems questionable. What on earth is a buy-to-let family? My experience is that the investment activity is normally carried on by an individual, although of course frequently the property is put in joint names with the investor’s spouse. I have never seen a holder of, say, shares in Marks & Spencer called a Marks & Spencer family. Investment has nothing to do with family (other of course than the fact that most people build up assets to create an inheritance for their family). But why should an investment in buy-to-let properties (which correspondents in the Times letters page commented is almost certainly one of the main factors in forcing property prices out of the reach of first time buyers, normally families looking for somewhere to live), be attributed to the family whereas other investments are not?

Be that as it may, apparently HMRC is preparing to clamp down on tens of thousands of buy-to-let property owners who many not have paid enough tax. Hurrah! It is bad enough that they are forcing young families into rented accommodation, but it is scandalous if they are fiddling their tax too? Er, No. In the view of the Times it is wrong for HMRC to seek to collect the tax that such people owe. A leader article “Taxing tolerance: Revenue and Customs should not be harsh with buy-to-let investors” tells us that the rental market could not operate without such people and that their tax treatment is so complex that no wonder many have mistakenly claimed a deduction for capital repayments on their mortgages so, whilst “it is of course, the Revenue’s duty to prevent tax evasion, it should however be prepared to acknowledge where a situation is confusing and place its emphasis on clarifying the position so that future tax payments are entirely accurate. It is unreasonable to work on the assumption that buy-to-let investors have sought deliberately to defraud the tax authorities in the past and that they should be punished by having extra interest charges and demands for penalty payments. This market would 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.”

There are a great many inaccuracies here. Asking for back tax is not turning an investment into a criminal activity. It is collecting the amount that parliament had decided it is fair for a landlord to pay. If the landlord deliberately understated his liability that is what most of us would call fraud and, as such, is a criminal activity to start with; HMRC’s uncovering the fraud does not turn it criminal! If there was not a deliberate understatement, collecting the tax due does not turn the understatement into a criminal activity. Even seeking penalties does not criminalise the activity; the penalty is imposed for not carrying out one’s civic duties as required by the law.

Secondly I very much doubt that HMRC “work on the assumption that buy-to-let investors have sought to defraud the tax authorities”. They are far more likely to work on the assumption that such people have been negligent in handling their tax affairs. Based on the Times articles, that is likely to be a reasonable assumption in the majority of cases.

Thirdly there are no “heavy extra interest charges”. Parliament has decided that people who pay their tax late should pay interest for the period that they have had the use of taxpayers’ money. The rate of interest is exactly the same if one pays six days later or six years late. The leader writer may be correct in describing the charges as heavy, although they are not much different to the rates that banks charge, and as they are not compounded over a period of several years they are probably less than if the taxpayer had borrowed from his bank and paid the tax on time.

Fourthly it is hard to see why people should invest in buy-to-let properties if paying the tax that is properly due on the rents makes the investment unattractive. It is certainly hard to see why HMRC should waive arrears of tax on such people, particularly as the capital growth on their investments is likely to have given them borrowing capacity to raise the funds to pay the tax.

Fifthly the situation is not confusing. The computation of letting income is very simple, subject to one proviso, and is well explained by HMRC in their notes to the Land and Property page of the tax return. The only real complication is the dividing line between repairs and improvements, but that dividing line is not the subject of their Times complaint.

This seems to be that when they borrow money to buy a property many people do not know if they have borrowed on an interest-only mortgage or a repayment mortgage. This presumably means that they did not read, or did not understand the mortgage agreement they signed and did not listen to what their mortgage broker would have told them. It also presumably means that when they completed their tax returns they looked at their building society or bank statements and said to themselves, “Clearly the interest cannot be this figure which the building society describes as “interest”. The building society is trying to mislead me. Obviously the figure of interest is the aggregate of the 12 figures that it calls “repayments”. Well if they can convince HMRC that they took all possible care and genuinely believed that the interest was not the amount described as interest, HMRC will not ask for a penalty. I suspect HRMC will take a hell of a lot of convincing though, because most people would regard such an approach as negligently completing the tax return.

The other “hard-done by” category of innocents according to the Times is “ghost” landlords, i.e. those who either deliberately sought to defraud their fellow taxpayers by not declaring their income or who did not realise that rental income is taxable. Surely even the Times can have no sympathy for the first of these. As far as the others are concerned there will again be no penalty on anyone who can convince HMRC that they genuinely believed that rental income is not taxable. Of course, bearing in mind that they knew that salaries are taxable, it is hard to see why someone should think that rents are treated more generously, but if that is the case, there is a no penalty.

Oh, and it is also wrong to suggest, as the Times does in one of the articles, that if someone wants to take advantage of HMRC’s limited offer of a discounted penalty, they only need go back 6 years; they actually need to go back 20 years, not 6. It is somewhat misleading to say that a penalty of 100% can apply when, as far as I am aware, HMRC have never sought such a high penalty even in cases of fraud, let alone negligence.

The real story is that HMRC are putting resources into collecting back tax due from landlords, whether the underpayment arises from fraud, negligence or a simple mistake, in exactly the same way as they collect back tax owed by employees, the self-employed and everyone else who has underdeclared their income for whatever reason. Neither ought it to be a “tax shock” that HMRC expect people to pay the right amount of tax at the right time. But that wouldn’t fill three pages of the paper.

Robert W Maas