The London Borough of Newham has suggested that its research has shown that half of all its buy-to-let landlords were not registered for self assessment with HMRC when it introduced a regulatory regime for its landlords. Their estimate is that maybe £200 million of tax is not being paid in London alone as a result of the failure of landlords to register to declare tax that they owe. This compares with HMRC's suggestion that they may lose £550 million of tax a year in this way across the country as a whole.
I have some immediate comments, and then some suggestions. The first is that the rate of non-compliance is at the higher end of research experience for non-declaration (most of which is US based) but still within it. If this rate of non-compliance is, however, to be found in a relatively easily traceable source then it may suggest non-compliance elsewhere in the UK is also higher than expected, including by me.
Second, simple extrapolation clearly suggests that the losses may be higher than HMRC's estimate. I am of course aware that absolute returns on letting in London may be higher than the rest of the country, but I would also not be surprised if gearing was too. In that case straightforward extrapolation may not be inappropriate and losses could very easily considerably exceed £1 billion. To put that in context, the loss in this area of the tax gap alone may amount to half the cost of running HMRC, who are nonetheless planning to slash those costs, and so the chance of tackling this issue over the next few years.
Third, to add a little more context, based on a number of sources, including data from HMRC and letting agencies, I estimated that maybe £3.2 billion of rent was undeclared for tax purposes in 2011. This was about ten per cent of the total rental market at the time, which implied a vastly higher compliance rate than Newham has now found. If the Newham rate was extrapolated at national average rents the undeclared rents would be £13 billion. This, I stress, does not mean tax is lost on that whole sum as costs can be offset even against undeclared income, but it does, rather worryingly suggest that I have been seriously underestimating tax gaps.
Third, the loss, which may when extrapolated across 32 London boroughs, be about £480 a property, seems very unlikely indeed to take into consideration unpaid capital gains tax. Much of the return from buy-to-let is made in this way. In 2011 I estimated that about twenty one per cent of all privately owned UK housing stock was in the buy-to-let sector, suggesting that the same proportion of sale transactions in this sector at that time were also likely to relate to such properties. Since gains were commonplace at the time this might have suggested almost 200,000 gains on such property should have arisen that year. In fact only 52,000 property sales were declared for CGT purposes. I accept, of course, that some properties may have been sold at a loss and others might have realised non-chargeable gains, but candidly I think this was a decided minority of gains. I estimated that maybe half of all gains were not disclosed as a result, a ratio remarkably similar to the non-disclosure rate Newham suggest exists. I did not attribute a loss to this sector in isolation: if I had it might have exceeded £1 billion.
What this makes clear is the staggering cost of the tax gap. What is as staggering is the government's refusal to recognise the scale of this issue, or to still tackle it properly. What is absurd is that, as Newham has shown, doing so is not hard.
If all landlords had to be registered with HMRC informed much to the problem would be resolved, and landlords could be made to pay the cost.
If only HMRC checked all property transactions for potential gains disclosure (which would not be hard; they are subject to stamp duty or its equivalent in most cases, after all) much of the rest would go away.
This does not happen though, for three reasons.
First, the government would rather cut what they call red tape than collect tax.
Second, they would rather cut costs at HMRC, using the excuse of austerity than collect tax. They are significantly cutting the number of staff at HMRC over the next few years.
And third, they'd rather inequality increased, which this failure on their part permits, than collect tax.
There is gross negligence by taxpayers going on here. But the reality is that the greater negligence is by government who refuse to collect tax owing for dogmatic reasons. We all have a right to be very angry with them.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I appreciate that I may be criticised for mere repetition, but the simplest way to tackle this type of problem in taxation is annual ground rent (AGR; aka LVT). Cheap to raise, and very difficult to avoid. It has all the virtues, and few of the vices of taxation. Repetition perhaps, but not perhaps needless.
I agree we need LVT
Along with a dozen or so other taxes
LVT is useful. To pretend it solves all tax problems is absurd however the issue is looked at
I am not attempting to be argumentative if I respond (with a little surprise) that I have not now (see above), or I think anywhere or at any time, claimed that “it solves all tax problems”; and I am a little perplexed why you have made that argument or accusation?
My apologies: that comment usually follows on
If I was wrong I apologise
I do not know where this comment will appear, but it is a reply to your reply….
My thanks for your gracious apology.
I am not defending this but given ‘social landlords’ ie housing associations are not even obligated to pay tax in the first place its a bit of the calling the kettle black etc . Especially as where I live the ymca is said to charge £300 per week which is well over £100 more than a private landlord.
After all on just what the social landlords receive in benefits and on the ‘low’ corporation tax rates would raise about £3 billion. Plus when the greens in this years manifesto said they would get rid of ‘buy to let’ tax breaks, given as far as I know the only tax breaks they get is for repairs/maintenance which would penalise the decent landlords and do nothing about the landlords whom the left talk about not having high standards.
They don’t pay tax because they are duty bound to reinvest profit for social purpose
Your logic is somewhat perverse.
Quite a few associations are going ltd company now.
The largest locally is scared of two events:
1. Right To Buy
2. Universal Credit
I forgot to add it was a bad move for the goverment to make housing benefit/UC to go direct to tenants especially with benefit sanctions it tempts tenants to not give said landlord rent and the ensuing eviction process which in turn leads to the rise in homelessness the last years. And conceivably there is no way of knowing whether a tenant is giving the landlord the rent or not, at least with it going direct that was very much clear.
So you would rather directly subsidise landlords?
Well given rental arrears has rocketed ever since it went to the tenant instead of the landlord I would suggest it would be good sense to make it go direct again? Plus you were talking about non payment by landlords so I was suggesting that would be easier to demonstrate if it went direct. I was not aware they are obligated to do more social housing, however given social landlords only built around 10k dwellings in 2015 they do not seem to be doing that much at all. Especially when one of the bigger ones after expenses made 300 million I would suggest many of them are not doing so at all. And the executives often have salries in the several hundred grand. Plus according to the national audit report outside london social rents have increased faster than private ones since 2006, and they receive 2/3rds of the housing benefit bill (despite some thinking the opposite)if as you say they are duty bound to reinvest in social housing why is there such a shortage? As stated whatever the rights and wrongs of so called private housing I would suggest if the tories are promoting what they call build to rent surely nothing good from the tenants perspective will come from it.
I would actually think that the government should give the money direct to the landlord. This reduces the arrears and helps the landlord to keep
the family in the property.
I am also upset when councils were stopped from leasing property direct from the landlord.
SOme of the people needing help, have health issues. We need to support them the best we can, not penalise them.
I agree with Sam in regards to salaries. The same with councils. A social housing company isnt really selling or making anything, they only need an accountant in charge. So why the need for a high salary.
I have a great deal of sympathy: I do not know why these salaries can be justified
Forgive me for posting yet again. Those on the left in my view should be trying to mend bridges with the ‘decent’ buy to let landlords. As it is clear (at least to me) the policies the tories have done to the small scale landlord is nothing about helping ‘first time buyers’ but making way for ‘institutional landlord’ which will have no human face or compassion to hardship just want to maximise their return to shareholders and their profit(as if it will be cheaper whatever they say, perhaps just maybe for a while it will be but once the ‘private landlord’ is gone they will ramp up the rent/they will use the privatized utilities example. And if people think non payment by private landlords is an issue now these institutional landlords I bet will be just like the well known multi nationals and the government will get next to nothing. Sadly though Corbyn/Mcdonnel are still banging on as if the tories have done nothing to regulate landlords which is not the case and not seeing the writing on the wall. If some social landlords have ignored their tenants concerns for decades (some report watched the other day) the idea these large scale landlords are going to so responsive to peoples needs is laughable in my view.
You miss the point
The left see little reason for private provision of most rental housing when there is clearly a better social model for this, which you seem all too keen to attack
Two questions;
Isn’t there a high number of MPs with considerable property portfolios?
Are they paying the taxes due?
Yes
We can’t know
One of those Mps was none other than the late Michael Meacher whom had one of the biggest portfoilios and was worth around £4 million, yet he was one of the closest to corbyn before he died. Yet labour often implies the tories are the party of the private landlord yet it was meacher whom had more properties than almost every tory MP!.
In 1911 the House of Lords (full of the largest landowners), brought down the Asquith Government’s Finance Bill because it contained arrangements to introduce AGR (aka LVT). This produced a famous constitutional crisis that led to a fundamental change; never again would the House of Lords vote against a Government Finance Bill.
Everybody has forgotten that the really important provision, AGR was never again introduced by any Government; which was a really big mistake.
Labour adopted it in the 30s but could not deliver
Wales is a step ahead with a requirement for landlord registration. Not for taxation purposes, but it’s a start.
“In its role as Licensing Authority under the Housing (Wales) Act 2014, the Rent Smart Wales service must process landlord registrations and grant licences to landlords and agents who are required to comply with the Housing (Wales) Act 2014. ”
https://www.rentsmart.gov.wales/en/
Tonight on Channel 4 at 10:00pm
” catching the tax dodgers “, if anyones interested
I’ll catch it
But not tonight
Not back from Edinburgh by then
As you say Richard, Capital Gains Tax rules for selling previously rented out properties seem generous.
My brother lived in a property for 5 years then rented it out for 5 years and made £110,000 gain and says he has no CGT to pay. Alright for some!
But I bet he’s wrong because I can’t make that stack since 20% is chargeable
Unless, of course, it was in joint names….when he may just be right
Using those facts, it looks like we have a PPR for 5 years out of 10, so 50% of the gain is clearly exempt.
Then we have another 15% coming out of charge because of the last 18 months being deemed to be a PPR, leaving 35% of the gain in charge.
That’s £38,500 of chargeable gain, which is just under the limit to be covered by lettings relief.
That takes the whole gain out of charge, without needing to touch the annual exemption.
You seem to be out of practice! 🙂
As I said, just out, maybe….
No – it’s comfortably out, and quite unambiguously so.
There’s not even any need for joint names.
If you “can’t make it stack” then perhaps you need to brush up on your CPD… 🙂
Andrew
So I forgot one small point
I accept it: I will change the message in future
Given the vast amount of crass commentary you have supplied here over time I think the words pot, kettle and black come to mind
It’s also fair to say my CPD does not need brushing up: I no longer advise small clients and my regulated income last year was precisely nil
Maybe you need to remind yourself about current CPD rules
Richard
The “crassness” of my comments has always been in the eye of the beholder 🙂
I didn’t realise that you no longer advise any clients – you seem to hold yourself out as being a practising tax advisor. Glad to know the position – in that case you’re quite right that you’re under no obligation to keep up to date.
The situation has changed over the last few years to reach this point
I am still regulated – but have given up just about everything but occasional and very specific assignments
And in this case the beholder has always been right in my opinion: when wrong I accept it. It’s a rare virtue
A minor point is that if your net rental income is over £2500 or gross rents of £10000+, only then does HMRC require a tax return. Outside of that your just obliged to tell them.
And how do they collect the data?
I’ m pretty sure access to data such as land registry & electoral roll isn’ t the problem, having the resources to utilise the data could well be!
I agree
AirBNB et al has led to a huge rise in amateur landlord. It would be a simple task to tally AirBNB “landlords” with HMRC receipts – especially as payments go through the AirBNB site.
The Spare Room relief also needs to be changed, it was introduced to help with housing, not as a way to make money through B&B. IMHO it should only kick in if the room is let for at least 3 months to the same person.