Proof of tax compliance slated for landlord licensing schemes

Taxman wants to make tax transparency part of landlord licensing process

HM Revenue & Customs (HMRC) wants to put an end to undeclared revenue disappearing into the hidden economy. Under the proposed regime, landlords applying for or renewing their house in multiple occupation (HMO) licence would need to include basic information about their tax registration. This is known as ‘conditionality’. The plans will also affect selective licence arrangements.

The plans are now open to public consultation until 2nd March 2018.

In practice, this addition to the licensing process would mean that applicants would need to tell the licensing authority if they are registered for tax and provide proof of this as part of compulsory licensing applications.

These checks would be handled in different ways, depending on whether the applicant is new to the market or not.

New applicants will be given clear guidance as to their tax obligations. The implication being that they are new to the market and have not yet finished completed all necessary paperwork. In this case, conditionality checks would require them to show that they understand their taxable status and will register as soon as they begin trading.

Meanwhile, for applicants renewing existing licences, they would be asked to provide evidence that they are tax registered.

HMRC is not planning on asking licensing bodies to carry out any tax checks. Applicants who could not provide sufficient evidence would be directed to the relevant tax department. However, failure to provide the information could result in a licence being refused. According to the consultation document, the proposal would make it harder for landlords to avoid taxes, either by intention or accidentally.

Upfront checks

This focus on getting tax registration right is important for landlords, as well as the government. Writing on FT.com, financial journalist Merryn Somerset Webb points out that if the government thinks a person has made careless errors in their returns, HMRC will delve into their person’s finances for the past six years. If HMRC think that the action is deliberate, the investigation expands drastically to cover 20 years. (Source: www.ft.com/content/9efa9f2a-833a-11e7-a4ce-15b2513cb3ff.)

So, any action that will ensure, right from the start of the process, that there’s no chance of falling foul of the taxman can only be a good thing.

As it stands, the consultation does not offer any firm proposals on how tax status will be checked. As tax status can differ depending on whether the licensee is an individual or business, the aim of the new powers would be to discover if a person is eligible to pay tax and is registered. The implication of the consultation document is that more meat will be put on the bones of this proposal, following feedback from licensing agencies and other interested parties.

‘Fit and proper’

The plan has already been through consultation in August 2016, where conditionality was highlighted as a possible avenue to stop money disappearing into the hidden economy.

One of the conditions set out in the 2016 consultation was that if conditionality were to become part of the licensing laws, this change must not place undue burdens on the licence provider or compliant businesses.

HMO licensing was chosen as part of the consultancy as it already requires landlords to show that they or their agent are ‘fit and proper’ persons to hold the licence. Introducing elements that cover tax affairs would not be too much of a leap away from the existing rules, the consultation document says.

Of course, with the government planning to increase the number of properties that require HMO licences, HMRC will also ensure that a rising number of landlords will need to prove their tax compliance. The idiom two birds with one stone’ springs to mind, as an estimated 160,000 properties would join the 64,000 licensed HMOs that would require licences. (See, www.purplefrogproperty.com/government-expand-licensing-rental-properties/.)

Prevention better than cure

While the government maintains that it “wants to see a strong, healthy and vibrant market” in the private rental sector, which “meets housing needs in a professional way”, it also sees that this market holds the potential for a minority to misuse the tax system.

In her FT.com article, Merryn Somerset Webb looks at the example of the London Borough of Newham. This particular part of the capital is ferocious in its handling of the rental sector under its authority. In its quest to hold its private landlords to the high standards it demands, the council handed over its list of 27,000 registered landlords to the HMRC. On investigation, 13,000 were not registered for self-assessment. While not all of these landlords will be dodging their tax bill, it seems this has highlighted to HMRC that some landlords’ tax affairs need to be looked at. (Source: www.ft.com/content/9efa9f2a-833a-11e7-a4ce-15b2513cb3ff.)

The proposed changes are based on the fact that prevention is better than cure, with tax issues being placed clearly and implacably at the start of the process.

The previous consultation also highlighted concerns that those landlords not too worried about tax compliance, might also be the same who are lax with other standards. Closer ties with all compliance agencies would see a rise in standards and support for landlords who did play by the rules, the Government says.

Certainly, HMRC are concerned about lost tax revenues from the rental market. Another of their innovations is the Let Property Campaign – an amnesty for landlords to declare tax which might have slipped off the books for one reason or another. (See: https://letproperty.campaign.gov.uk/.)

You can read the full consultancy document at www.gov.uk/government/Tackling_the_hidden_economy.pdf

The closing date for responses is 2nd March 2018 and replies can be sent to the following contact details.

If you are interested in taking part, you can send your responses to: isbc.compliancepolicy@hmrc.gsi.gov.uk or by post to : Georgina Treacy, HMRC Room G/72 100 Parliament Street London SW1A 2BQ