Pitfalls for those running property rental businesses

Q. I run a property rental business and I think my tax returns are in order but I have heard that HM Revenue and Customs (HMRC) are taking a tougher stance with landlords – can you explain what is happening?

A. There is increasing evidence that HMRC is taking a greater interest in the rental sector. Keeping full and proper records of property rental business expenses is an important task for all landlords. For example, HMRC could seek to disallow such expenses if there is insufficient evidence that the expenditure has been incurred, and can impose penalties for failures in record keeping.

All property rental business owners are subject to the statutory record keeping requirements. The future introduction of ‘making tax digital’ is likely to add to this burden in many cases.  

Which records?

The tax rules for record keeping by property rental business owners are the same as for the self-employed. There is a general requirement to keep all such records as may be needed to enable the business owner to make and deliver a correct and complete return for the year or period. 

These records need to include records of all amounts received and expended in the course of the business and the matters in respect of which the receipts and expenditure take place.

How long do I need to keep the records for?

Landlords are generally required to retain their records until the end of the fifth anniversary of 31 January next following the tax year. For example, property rental records for the year ended 5 April 2017 must be kept at least until 31 January 2023. 

However, in some cases, the records may need to be retained for a longer period (e.g. when an HMRC enquiry into the relevant tax return is completed, if later).

How much is the penalty?

Failure to comply with the record keeping requirements can result in a penalty of up to £3,000 per tax year, so penalties could potentially accumulate for record keeping failures over several tax years.

Anything else?

If a property is let at less than full commercial rent (e.g. to a relative), HMRC considers that the expenditure relating to that property is likely to fail the ‘wholly and exclusively’ test for deduction purposes against rental profits. Strictly speaking, no expenditure on such properties is therefore allowable as an expense of the rental business. However, in practice, expenses may be deductible up to the amount of rent from that property.

As with all things tax, it does make sense to take proper advice.