Insights

HM Revenue & Customs have started two new campaigns to target taxpayers suspected of not paying enough tax. This time, property owners with short-term or holiday rental properties are under the spotlight, together with previous R&D tax credit claimants.

Nudge letters sent to property owners

According to the Financial Times, 127,000 individuals in the UK declared ownership of businesses for furnished holiday lets (which includes short-term lets) on their personal tax returns in the 2019-20 tax year. HMRC believe they are missing important revenues from these owners.

So far 1,000 or so property owners suspected of tax underpayments have been approached with a ‘nudge’ letter. The evidence behind these approaches was gathered through online booking platforms like Vrbo and Airbnb, which are obliged to share data of registered users and their financial transactions. Issuing the letters is a way to give taxpayers a genuine chance to rectify any discrepancies, without facing any formal penalties. Nudge letter recipients have 30 days to respond, or they may face a tax enquiry being opened.

Owning short term holiday rental property is more tax efficient than long term residential rental, because there are fewer restrictions in place regarding allowable expenses. For example, holiday let owners are still able to offset loan interest in full; can claim renovation expenses for establishing their rental property on the market; claim ongoing wear and tear expenses; and plus if they sell the property more relief is available to reduce the rate of  capital gains tax.

In order to as a furnished holiday let, residential property must be available to rent for at least 210 days a tax year and be actually let to tenants for at least 105 days the tax year.  For a short-term let, no single rental period can exceed 31 continuous days.

To combat the problems that HMRC suspects, owners of short term rental property may be required to formally declare their ownership on a national register in the future. Whether such a register can be properly enforced remains to be seen, because media reports suggest that the enforcement of the beneficial ownership registry which is currently in place for UK properties owned by non UK taxpayers through a company are being widely flouted.

Nudge letters sent to R&D tax credit claimants

HMRC has also sent ‘nudge’ letters to over 2,000 companies to target suspected fraudulent and inaccurate R&D tax relief claims. Recipients are being asked to check that claims submitted are correct and if there are any mistakes, that they rectify them on their corporation tax return. The sums involved in deliberate R&D tax credit fraud are believed by HMRC to be large; they have estimated that tax of £469m was lost in 2021-22; nearly 5% of the total R&D tax relief given to companies.

Given that the rules for R&D tax credits have been restricted recently, it is possible that some DIY claims are inaccurate due to genuine misunderstandings. This ‘ nudge letter’ approach gives claimants a grace period to get their records in order and make a voluntary disclosure before filing company tax returns. If errors are found by HMRC that have not been disclosed following the issue of a nudge letter, a formal enquiry may be opened and penalties payable.

Apart from the risk of an enquiry, another good reason for ensuring previous R&D tax credit claims are accurate is if you are considering selling your company. During the due diligence phase, past claims will be inspected by auditors and mistakes could either adversely affect the final valuation price or jeopardise the entire transaction.

If you have received a nudge letter from HMRC – for rental property or R&D tax credit claims - and would like some advice on rectifying any mistakes before you respond, please contact us via partners@rjp.co.uk.