Why HM Revenue and Customs (HMRC) is finding it pays to take a closer than usual look at property investors.
The tax man likes to talk tough. If HMRC doesn’t feel it is not collecting all the tax it should, it makes loud warnings and sends out extra staff to investigate areas where it thinks more should be being collected.
In recent years, all manner of professions and industries in certain parts of the UK have come in for closer scrutiny. In one particular sector, however, HMRC has been taking an especially close interest in what goes on all over the UK: property. And this interest appears to be paying dividends for the tax man.
The large-scale failure of buy-to-let investors to declare their gains and pay the correct amounts of tax led to HMRC launching an offensive on the sector. This offensive now appears to have reaped record hauls of capital gains tax.Tax investigations – undertaken when officials believe there is evidence of underpayment – are resulting in record hauls of capital gains tax.
Figures recently released show that tax inspectors obtained £136m as a direct result of probes into capital gains tax underpayments for the year 2013-14. This was a 24% increase on the previous year and is being explained largely as a consequence of HMRC putting extra resources into scrutinising the property investment sector.
HMRC knows, just like most people, that rapidly rising property prices have prompted larger profits for investors in recent years. Those investors may either be unaware of the capital gains tax due on the profits, understating what they should be paying or even deliberately concealing all of their taxable gains. All three options now seem dangerous.
According to official figures, just under half a million taxpayers are registered with HMRC as owning a property other than their main residence. And yet the authorities believe the true figure is about three times that amount – 1.5 million. HMRC has been clear in the past about its desire to see landlords pay the correct amount of tax on rental income. Now capital gains looks to be the main target.
Official forecasts state that HMRC could collect £6.7 billion in capital gains tax in the financial year 2015-16, as property prices continue to rise. Statements in recent months from the HMRC certainly appear bullish and confident about their ability to find more property investors who are not paying the tax that they should. So what should property investors do if they fear that their tax affairs may attract HMRC attention?
If HMRC do start looking at your property investment affairs the strongest defence against accusations of wrongdoing is proof. A fully-documented accounting system will show adherence to tax law. If need be, hiring a legal expert familiar with compliance issues can ensure an individual property investor or a syndicate has systems in place that can both prevent wrongdoing and show any investigating authorities the evidence to support this. Without such systems in place, it can be difficult for the investor to show they should not be prosecuted or fined for their tax affairs; especially now that HMRC is on the offensive when it comes to capital gains tax.
At Rahman Ravelli, we have made sure that all sorts of companies, investment groups and individuals are legally compliant and we have represented many whose tax affairs have been the subject of official investigations. Our experience in HMRC-related matters has led to us successfully representing clients in the most straightforward cases of tax evasion through to the most complex, detailed allegations of tax fraud. Evidence in such cases is, as we mentioned earlier, vital. But it can be equally important to know exactly how to handle tax investigators. It is clear that HMRC sees capital gains tax as a way of pulling in larger than ever revenues. If you are a property investor that finds yourself the subject of such an investigation as part of this HMRC crackdown, it is hard to see how investigators are going to drop the matter. That is not the HMRC way at present. And HMRC also has the Code of Practice 9 (COP9) by which it can try and persuade those under investigation to disclose any underpayment of tax.
The circumstances surrounding a capital gains tax investigation are, therefore, fairly intimidating for someone more used to bricks, mortar and the balance sheet. Any property investor who has the slightest concern that they may be under HMRC investigation – or about to be – requires appropriate legal advice as soon as possible. Such legal expertise can establish if an investor has done anything wrong regarding their tax affairs. This advice will also determine the best course of advice to take. HMRC’s recent track record on recouping capital gains tax indicates that it is not for giving up on any suspicions of non-payment.
Property prices have risen in many parts of the UK in recent years. Nobody could disagree with that. As a result, the profits to be made through investments in property have also increased. However, it would be extremely foolish to believe that the HMRC is unaware that you have not declared all such profits for the purposes of tax.
The gains have become higher in property. But, when it comes to tax evasion, so have the stakes. HMRC has raised those stakes and is keen to keep raising them. This means that hoping to escape detection or persuading yourself that your tax affairs are probably just about okay is an even riskier approach than it used to be.
Investors in property usually take pride in being able to identify and act on a building that offers good potential for a profitable return. If they are to remain solvent, profitable and legally safe it is equally important that they realise the true value of investing in a careful, considered and compliant approach to their tax affairs.
Otherwise, HMRC will take pleasure in taking a wrecking ball to the fortunes of the most successful property investor.