HMRC Investigates Airbnb Landlords with Short-Term Lettings

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HMRC is writing to landlords who may have undeclared income from short-term lets and holiday homes – with online platforms such as Airbnb and Booking.com now obliged to provide payment data to the government. The number of individuals with unreported income on second homes is believed to be around 700,000, about a third of landlords in England and Wales. If you’ve received an HMRC letter, and/or have rental income you think you need to declare, carry on reading to find out more, or contact us today for professional advice.

What Is ‘Undeclared Income’?

Taxable earnings that aren’t reported to HMRC are viewed as ‘undeclared income’. If earnings are taxable, they should feature in your annual Self Assessment Tax Return, so that you pay the right amount of Income Tax and National Insurance. If these earnings are missing, you are avoiding paying what you owe, which could result in an HMRC investigation. One of the latest HMRC ‘nudge letter’ campaigns is focusing on non-compliance through digital platforms like Airbnb, and writing to taxpayers whose rental income doesn’t match their tax return data.

Have You Received a Letter from HMRC?

If you’ve received one of these ‘nudge letters’ from HMRC, we recommend a full review from a tax professional before responding. You may not actually owe any tax, and there’s no statutory requirement to sign the Certificate of Tax Position (or time period restriction applied) that HMRC has sent out. However, these letters should never be ignored, and your response should be prompt (at least within the stated deadline), to avoid a potential HMRC investigation.

Making a Disclosure to HMRC

If an HMRC disclosure is required, this should be managed carefully, with expert assistance. A disclosure gives you full control over the process, and allows you to determine both potential lost revenue, and behaviour, that led to non-compliance. This will help you reach a settlement quicker with HMRC than if they were to open an investigation, and reduce the level of any potential penalties.

To guide you through the disclosure process, our tax experts will:

  • Carry out a full review of your tax affairs to ensure all necessary issues are disclosed
  • Help you with registration for the right HMRC disclosure facility
  • Prepare and submit a professional disclosure that will avoid unnecessary tax, interest and penalties
  • If the tax payment is unaffordable at this time, we can help you negotiate a time-to-pay arrangement with HMRC, that suits your needs and individual circumstances

We can also help you remain fully compliant with HMRC in the future, which includes recording property income, submitting it on your tax return, and paying the tax owed (including any Capital Gains).

Fail to Make a Disclosure – Pay the Penalty

If you don’t tell HMRC about your undeclared income, you’ll usually be expected to pay 100% of the unpaid tax, plus interest, and an accompanying fine. Please also note that HMRC are allowed, by law, to review your income from the past 20 years, and could even launch a criminal investigation against you. There is a Code of Practice 9 (COP9) Contractual Disclosure Facility that lays out your rights if you have previously chosen not to declare rental income – but if this applies to you, we strongly recommend seeking expert advice before getting in touch with HMRC.

Tax Rules for Short Term Lets

There are two tax thresholds in place for short-term lettings – the Rent a Room Scheme, and the Property Income Allowance. If you’ve received rents in a tax year that don’t exceed these two thresholds (N.B., they can’t be combined for the same property), you don’t have to report the income on your tax return.

If your income has exceeded these thresholds, it will need to be declared, but there are expenses you may be able to deduct, that can help to reduce your taxable profit. An expense example could be replacement of furniture (like-for-like) that has reached the end of its useable life.

And, if you have a buy-to-let mortgage on a property, you can get a tax credit for residential financial costs, currently restricted to 20% tax relief against rental profits. You are also still entitled to the Rent a Room Scheme as am alternative if renting a room in your personal home – particularly useful for Airbnb landlords who live in the property that they’re providing as accommodation.

The Rent a Room Scheme

If you rent out a room in your own home, the Rent a Room Scheme allow you to receive rents of up to £7,500 per year, tax-free – which goes down to £3,750 if your property is jointly owned. This exemption is automatically applied, but doesn’t apply to second homes or rental properties.

If your rents exceed this amount, you’ll have to complete a Self Assessment Tax Return, but can opt into the scheme to make the first £7,500 non-taxable.

Property Income Allowance

The Property Income Allowance is currently £1,000 per tax year, so if your gross property earnings are less than this, you don’t need to report them to HMRC. However, this allowance doesn’t apply to rooms in your personal home, and can’t be claimed alongside the Rent a Room Scheme.

Need Help with Landlord Income Disclosures?

We understand the work that goes into being an Airbnb landlord, so let us take care of your tax affairs. Our property tax experts can assist you with your short-term property let disclosures – if you’d like to find out more, you can message us through our online form, call 01743 562430, or email hello@mercianaccountants.co.uk.

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