Buy-to-let investors are to be the focus of a fresh clampdown by the taxman after figures released by HM Revenue & Customs revealed that 62 per cent of landlords questioned informally by inspectors were not paying the right amount of tax, warns UHY Hacker Young, the Birmingham accountancy firm.
HMRC has just admitted that it is preparing, in its terms, to "take a concerted approach to helping landlords comply with their tax obligations".
The new informal tax 'interventions', of which there are six types, involve HMRC contacting taxpayers by telephone, letter or in person to discuss aspects of their tax affairs identified as being at high risk of error. The interventions allow HMRC to avoid having to open a formal tax enquiry, which can be far more restrictive in terms of the areas it can probe.
There are estimated to be around 400,000 buy-to-let landlords in the UK. HMRC is reported as saying 80,000 could be paying the wrong amount of tax.
According to UHY Hacker Young, the reason why interventions targeting the buy-to-let sector are so successful is that there is a lot of confusion among landlords about how income from such investments is taxed, with mistakes common.
Malcolm Winston, partner, said: "Most new buy-to-let landlords were previously only taxed under PAYE, so tend to have little experience managing their own tax affairs, which is where problems often arise. HMRC is unlikely to have sent self-assessment returns to these investors and new buy-to-let landlords often incorrectly assume that there is no tax to pay.
"The fundamental mistake landlords make is assuming that losses from buy-to-let property can be offset against general income."
UHY Hacker Young says that other common mistakes buy-to-let landlords make include:
* Buy-to-let investors often assume that if they are not making a profit from a buy-to-let investment, there is no need to notify HMRC, but in fact they must complete a self-assessment return, regardless of whether there is any tax to pay - even if the capital gain on a property is less than the annual exemption and there is no capital gains tax to pay.
* Repairs and improvements to buy-to-let properties are taxed differently. If expenditure permanently enhances the value of a property, such as an extension, it cannot be offset against rental income. Repairs are a tax deductible cost.
* Buy-to-let landlords can only offset the interest component of their mortgage against rental income, not the actual capital repayment, but investors often mistakenly assume that both can be offset against tax.
* Many buy-to-let landlords coming to the end of fixed rate mortgages are selling their properties because of rising interest rates, but are incurring penalty cancellation charges which are not tax deductible.
* The legal costs of drawing up long term leases for tenants are not tax deductible. This is often overlooked because letting agency fees and other costs, such as advertising, are allowable.
* Landlords selling a buy-to-let property cannot deduct the cost of any moveable furniture left behind when assessing their capital gains tax liability on the property since it is not reflected in the nature or state of the property itself. Furniture left behind should be sold separately to the actual property.