Shouldn’t an accountant who has actually prepared tax returns know this?

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.

OK, that’s interesting:

Up to 13,000 landlords in just one London borough have been identified as failing to declare their rental income, prompting estimates that unpaid tax in the capital is costing the public purse nearly £200m.

Newham council in east London, the first to introduce a compulsory borough-wide licensing scheme for landlords in 2013, shared their names and property addresses with HM Revenue & Customs. Newham, which has 27,000 registered landlords, said it understands that 13,000 had not registered for self-assessment, which is generally required if a property owner receives £2,500 a year or more in rent. HMRC would not confirm the figure.

No, you don’t have to register if you receive more than £2,500 in rent. You must register if you receive more than £10,000 in rent. Or, more than £2,500 after allowable expenses. That’s after maintenance, and or depreciation, and until recently at least, after mortgage interest.

Ritchie then charges off to talk about gross rental income, entirely ignoring this basic point.

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.

He even mentions costs against income without grasping that you only have to register if your net, not gross, income exceeds £2,500.

So, more of the usual absurd twattery there. It gets worse of course:

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.

The portion of buy to let is expanding in the housing supply. Which does indeed mean that more are buying than selling, so we can’t get to the number of sales by looking at the average of holdings. That’s not even accounting, that’s just statistics.


24 thoughts on “Shouldn’t an accountant who has actually prepared tax returns know this?”

  1. Tim

    I knew you would love this – I mean for me he jumped the shark four years ago but based on this and other recent blogposts it really is time for the men in white coats, for his own sake if not that of the wider community.

  2. I note that the Guardian article fails to mention how vibrant and diverse these tax evading landlords are.

  3. Newham “understands” that 13,000 are not registered for Self Assessment. HMRC would not confirm the figure.

    Knowing the speed at which cross-referencing would take place it would take a long time to work through 27,000 names. And then HMRC would not divulge any info.

    So the 13,000 Is a highly dubious figure.

    And the rest pure pointless speculation.

  4. He has (stopped clocks and all) a point though. Increasingly property is being bought and rented out by people who have no experience of the tax system at all, as they have always been on PAYE. So whether you call it conscious tax evasion or an inability to navigate a system that they are unused to, the fact is vast swathes of people are owning houses and not paying tax on the rental income they receive. I personally know a chap who is a teacher who bought a flat and rented it out, cash in hand, nothing declared at all.

    The world has moved on from everyone working in a factory and getting their wages in an envelope at the end of the week. More and more people are getting income from multiple sources, some PAYE, some self employed, some investment income. The old system of trying to tax people before they get their hands on their income is starting to falter. Self assessment is largely done on a honour basis – you could declare what you liked, and the chances of being found out are quite slim, increasingly so if more and more people are falling under SA.

    So the chances that the vibrant denizens of Newham are going to behave like middle class Englishmen and voluntarily cough up what their incomes are is vanishingly small.

  5. His idea of “preparing” a tax return probably means pouring gravy over it after it comes out of the oven.

  6. Plenty of landlords at the lower end of the market ask for payment in cash, and Newham is definitely the lower end of the market. But that means we can’t extrapolate across the whole country: most places are nothing like Newham.

    This is unusual territory for Ritchie. It’s simple black market, cash-in-hand tax dodging. He can’t deploy his usual tactic of bamboozling the Guardian’s readers with jargon.

  7. Incidentally, why are you allowed to have a net income of £2499 from rent and pay no tax on it? Seems rather unfair. Man who does £40/week overtime pays extra £700 tax, man who rents out the room above his shop for a net £40/week pays nothing………..

  8. You do. You just don’t have to make the special registration as a landlord. You should still declare it.

  9. The article said:

    “said it understands that 13,000 had not registered for self-assessment, which is generally required if a property owner receives £2,500 a year or more in rent.”

    Is that wrong then? That if you have £1 income from rent you should be on self assessment? How do you pay tax on the extra income if you don’t send in tax return?

  10. Jim

    Spot on – I would add certain other ‘alternative assets’ like P2P which have attracted thousands driven by ZIRP. Technically all these assets are subject to income tax…..

  11. @Jim.

    if you have PAYE income your rental tax could be collected by adjusting your PAYE code.

    Note that you have to register for Self Assessment if the tax could not be collected via such a mechanism AND you have to register for Self Assessment if your rents are over £10K gross or £2.5k net.

  12. AndrewC,

    > your rental tax could be collected by adjusting your PAYE code

    But how would they know the amount by which to adjust it, in the absence of a SA105?

  13. @ Andrew M
    Andrew C said that you have to complete a self-assessment tax return if you have property income in excess of £2,500.

  14. Also, with rent of £2,500, you’re often into rent-a-room relief, which takes you out of tax anyway.

    I do wonder how many of those landlords are renting out rooms rather than entire properties.

  15. As usual the UK leads the way in imposing a massively complex system of Income Tax. As usual, twats like Snippa come along and want to make it even more complex. And then they moan that HMRC are struggling to collect all the tax theoretically due. Could the answer be to recruit another few million tax collectors? That is a sure way to get the populace top learn, at first hand, the Joy of Tax

  16. @AndrewC: thank you, I’d forgotten the whole PAYE tax code thing, having been on SA all my life as self employed.

  17. I’m sceptical of the numbers being put out, presumably by Newham council.
    They say the Private Rented Sector has advanced from 23% to 46% of dwellings between 2009-2015. Given that the 20% social sector ( councils plus housing associations ) isn’t going to budge much that is an extraordinary transition from owner occupier to private rented – possible over 15 years perhaps but not over 6. Has the white flight of owners to Essex really been that extreme in such a short time?
    When the LL registration scheme began they say they expected about 5,000 registrations but got 27,000 who knew the consequence of this would be inviting officials to check them out as fit and proper people. This is local government but they cannot possibly be that ignorant of the composition of their own borough.
    Then we are supposed to believe that up to 13,000 are willing to part with their details to local government but hide their income from central government ( HMRC ), if you follow the Snippa logic.
    The VOA says there are 112,500 residential properties liable for council tax in Newham – I trust that number, but something is fishy about the others, or Snippa’s logic, I just can’t be sure which.

  18. According to the VOA the bottom quartile of rents in Newham still equates to over £14k of rental income, so the vast vast majority should be declaring the rental income. I can’t help thinking there has been some double counting here by Newham, maybe co-owned properties ( e.g. husband and wife ) get allocated two landlord registrations, I just don’t know.

  19. “Then we are supposed to believe that up to 13,000 are willing to part with their details to local government but hide their income from central government ( HMRC ), if you follow the Snippa logic.”

    Who said they wanted to admit they were landlords? They had little choice – the council can easily find out who owns a property via the Land Registry and knows who pays the council tax or business rates, then its just a case of comparing the lists. They faced a £20k fine and possible loss of the property for non-registration, what would you do? And anyway one suspects that many will not have realised that all their details will be handed over to HMRC. This has turned over a large rock and a lot of things are now scurrying around in the daylight.

  20. When I was in HMIT we used to manually check voters lists for HMOs (houses with multiple occupation) as they were likely to be being let. Then check land registry to find the owner then see if they were returning rents.

    That was late 80s to early 90s.

    As someone else intimated about today, many of the ‘missing’ landlords back then were also from vivid and colourful ethnic groups that add so much to our culture.

  21. @ Bongo
    Perhaps all (or most) of the white owner-occupiers have fled to Essex and – having read all the stories in the MSM about house price inflation – have rejected the offers for their old house and chosen to let it instead.
    How many of those will have *net* rental income after expenses and interest costs in excess of £2,500? Especially in Year 1 where the landlord has all sorts of one-offextra costs..

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