How to minimise HMRC penalties for tax arrears

The Revenue’s battle against those whose affairs may not completely be in order is continuing and to encourage people to sort themselves out sooner rather than later HMRC are currently running various campaigns.

Whilst the biggest carrot available is to have your affairs in line so the HMRC leave you alone, these campaigns represent the (small) carrot with the prospect of lower penalties if you voluntarily advise HMRC of any irregularities rather than the stick approach with higher penalties if HMRC find out about it first and then prompt you to tell them.

The Let Property campaign has been running for a while and is specifically targeting landlords – either deliberate ones (where you consciously invest into a property) or accidental ones (where you inherit a property or end up with a spare one as a result of marriage, for example).  A landlord also includes those who have lodgers although the Rent-A-Room rules do provide a healthy tax relief of currently £7,500 against any tax ultimately due.  Even if the property is let to family members, it is still a taxable source of income and should be declared.  You should also declare if your total income is below your personal allowance and/or covered by Rent-A-Room and no tax is due.  (It is up to HMRC to allow you not to file Tax Returns, not for you to decide arbitrarily not to tell them in the first place.)

If a landlord has previously declared but has made errors in his/her figures (for example including capital repayments with the interest figures, or understating the gross income by declaring the net rent received from the letting agent rather than the gross rent before commission) these errors may be classed as a careless mistake and you may only need to go back six years to correct.  If, instead, you had omitted to advise HMRC of the rental income in the first place for whatever reason, you may need to go back 20 years.  Penalties and interest under the Let Property Campaign are “Self-Assessed” although HMRC do give very strong guidance as to what rates of penalty they will consider acceptable.

Another campaign that is currently running is the Worldwide Disclosure Facility (WDF).  This is a rather short-lived scheme and is targeted at those in the UK who have any offshore income that should be declared, or if they are not in the UK (non-resident) who receive rental income from the UK.  With changes to how investment income is taxed from 2016/17, you may find yourself with a different tax position to what you had thought should, for example, you have a managed portfolio which invests in the Channel Islands or the Isle of Man (which are both offshore for tax purposes).  HMRC are particularly interested in those who have become UK resident following the recent change in legislation on domicile and residency status which can mean a loss of non-UK status after only one tax year.  The WDF is only allowing voluntary declarations until 30 September 2018 when it will change to the Requirement to Correct (RTC) scheme which will have far less beneficial terms.  The best advice therefore is if you have not already checked your tax status recently and have in any way considered yourself to be non-resident or non-UK domiciled in the past or have income or connections with any offshore investment, you should check your tax position without delay and take advantage of the WDF if you can.

The penalties (the sticks) for the Let Property Campaign, WDF and for any other campaign or enquiry are in bands.  These bands are dependent on the severity of the issue, whether you voluntarily tell HMRC or whether HMRC ask about an issue first (even outside of a “formal” enquiry).  The lowest band of penalty carries a maximum of 15% for minor unprompted errors – a small stick – and could even be as low as 0%.  The highest band of penalty for an error that was deliberate and concealed is 100% (the bigger stick) in addition to the tax due in the first place (plus interest)

After the end of WDF in September 2018, HMRC are planning to increase the penalties for RTC for any offshore infractions that ought to have been disclosed earlier to a flat rate of 200% of the tax due no matter what the reason of the error.  There are currently plans for the possibility of negotiation down to a 100% penalty for full co-operation under the enquiry.  (This is a baseball bat-sized stick).  HMRC are also introducing asset-based penalties of up to 50% of the asset value (which is a caber-sized stick).

With the Common Reporting Standard (CRS) meaning that HMRC are regularly exchanging information with over 100 non-UK tax jurisdictions and are amassing huge amounts of data on people’s income, it is far better to sort out your affairs rather than sit and wait for HMRC to start asking questions about any discrepancies that they think might exist.

As Martha & the Vandellas once sang: “Nowhere to run [to]”