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When you are a residential property investor or landlord, it’s crucial that you disclose your rental income tax properly and pay the exact amount you owe to the UK tax authority. When HM Revenue and Customs (HMRC) suspects that you are non-compliant, they will send you a nudge letter to inform you that they will do investigations into your taxes.
This article will give you helpful insights about what to do once you receive a nudge letter from HMRC. We will also guide you through taking part in the LET property campaign so that you avoid hefty penalties if discrepancies are discovered in your tax situation through HMRC’s tax checks.
Why Did HMRC Send You a Nudge Letter?
HMRC doesn’t send nudge letters to just anyone renting out their residential properties. With their various sources of information, they get tip-offs that your tax situation needs investigation. This can have heavy consequences if you deliberately choose not to come forward that you are receiving rental income.
It is relatively inevitable that you get caught being a residential property investor or landowner, if you plan not to disclose, or are paying improperly. This is because HMRC can access details from your footprints such as land registry, utility firms, local authorities for council tax, mortgage applications, and third parties like tenant searchers or letting agents.
Once you receive a nudge letter, take the matter seriously even if you think you are complying with the tax regulations properly and honestly as HMRC intends to prove the irregularities with your taxes and impose you with penalties that depend on the quality of your non-disclosure reasons.
This is how beneficial the LET property campaign is as it lets you avoid receiving a nudge letter and get ahead of HMRC, telling them that you want to check your own situation and not them, for much bigger penalties await if they are the ones who investigate. Read on to find out how the LET property campaign can help you.
How Does the LET Property Campaign Work and How Can You Benefit from It?
LET property campaign (LPC) is HMRC’s initiative to encourage residential property investors and landlords to voluntarily disclose their undeclared rental income and take their tax matters into their hands. As an incentive, they reduce your penalties that would have been otherwise bigger if they sent you a nudge letter and did the tax compliance check themselves.
You can do voluntary disclosure through LPC when you are a renter of one or more properties, a room in your main home, a holiday room that you are also using, and specialty rooms such as for students or employees. It may also apply to you when you live abroad yet rent out a residential property in the UK or the other way around, such that you live in the UK but are also renting out a residential property abroad.
LPC will not apply to companies or trusts renting out residential property or those who are letting out commercial properties such as lock-ups, garages, and shops.
If you think that you have undisclosed rental income, be sure to inform HMRC immediately so you can avoid receiving a nudge letter and reap the benefits of lower penalties. The number of years imposed on you to pay for your penalties depends on why you didn’t disclose your income or underpaid your income tax.
Before making the voluntary declaration, know where you fit in any of the reasons HMRC suggests, which could be a simple error, careless mistake, or deliberate evasion of your tax responsibility.
If you simply made a simple mistake of underpaying but you have registered for self-assessment tax return on time and accurately calculated your taxes, HMRC may require you to pay for up to four years. Whilst for careless mistakes as paying so little due to carelessness, you may have to pay HMRC for up to six years.
Deliberate non-disclosure gets the heaviest penalty as it is considered tax evasion. For violating the law, HMRC may penalise you for up to 20 years amounting up to 35%. If you’re shown to have no motives to evade your tax responsibilities and simply fail to register for self-assessment, you may be penalised for up to 10%.
There may be instances when HMRC doesn’t agree with your declared information. It could be that you submitted incomplete or wrong information or inaccurately worked out your interests. When this happens, HMRC may reject your request for voluntary disclosure, which means you will still receive their nudge letter informing you of an upcoming tax check.
This is why it’s so crucial to seek the assistance of tax experts whilst you are preparing all the information so that you submit complete and accurate records. Their presence is most crucial in case you are dealing with tax enquiries as they can serve as a buffer between you and HMRC, that even without voluntary disclosure, you get minimal penalties nevertheless.
How to Avoid Receiving a Nudge Letter: Take Part in LPC
The best you can do is take part in LPC before HMRC sends you a nudge letter. The same steps apply to you whether you receive a nudge letter or are making a voluntary disclosure through the LET property campaign.
You notify HMRC first through registration, requesting for voluntary declaration. They will write back to you within 15 days and provide you with a disclosure reference number (DRN). The disclosure will be within 90 days.
After checking all your records are correct and complete and figuring out why you are to be penalised, you proceed to calculate and pay what you owe. You will need the help of accountants to accurately calculate how much you should be paying and submit a formal offer of that amount.
HMRC will then decide whether to accept or reject your offer. Throughout the process, be ready to provide them with any further information if they request it.
Why You Need Help from Tax Advisors and Accountants
A little mistake can lead to penalties. It’s also a very hassling and complex task to complete all the needed information requested by HMRC, whether you are requesting voluntary disclosure or are facing tax checks. Tax advisors can guide you throughout the process, whilst accountants can provide you with accurate payment calculations. Both help you to minimise your penalties as best as they can.