If you have undeclared rental income, it can be easy to think that making a disclosure to HMRC simply means working out how much rental income you received, calculating the tax and sending HMRC the figure.
But there is considerably more to it than that.
When I work with landlords on historic rental income, calculating the tax is only one part of the disclosure.
We also need to understand the history of the property, establish which tax years are affected, review the income and expenses, apply the tax rules for each year, consider interest and penalties and make sure the figures being disclosed can be supported.
And that work matters because ultimately, you are making an offer to HMRC to settle the tax you believe is due.
First, you need to understand what actually happened
Before calculating anything, I want to understand the history.
When was the property purchased?
When did it first become available for rent?
Did you live in it yourself at any point?
Was it continuously rented, or were there periods when it was empty?
Was the property owned solely or jointly with somebody else?
Was a letting agent involved?
Has any of the rental income previously been reported to HMRC?
These aren’t simply background questions.
The answers help establish which years need to be considered and what information we need to obtain.
If you’re not sure what information you should gather before getting started, I’ve explained this in What Information Should I Gather Before Speaking to an Accountant About Undeclared Rental Income?
If the starting point is wrong, everything that follows can also be affected.
Then we need to establish the income and allowable expenses
Once we understand the timeline, we can start looking at the figures.
How much rental income was received?
What expenses were incurred?
Do we have letting agent statements, bank statements, mortgage information, invoices or other supporting records?
If some of those records are no longer available, you can also read; Undeclared Rental Income: What If I Can’t Find My Records?
And importantly, are the expenses actually allowable for tax purposes?
Just because money was spent on the property doesn’t automatically mean it can be deducted from the rental income.
The tax treatment can also differ depending on what the expenditure relates to and when it was incurred.
So this isn’t simply a matter of adding together everything that appears to be a property expense.
The tax rules may not be the same for every year
This becomes particularly important when the undeclared rental income goes back several years.
Tax rules change.
One example is the way finance costs for residential property landlords are treated.
The rules applying today aren’t necessarily the same rules that applied throughout the entire period of a historic disclosure.
That means you can’t simply take one calculation method and apply it across every year without considering which rules applied at the time.
Each affected tax year needs to be considered properly.
The disclosure isn’t only about the tax
Once the tax has been calculated, the work isn’t necessarily finished.
HMRC will also expect interest to be considered.
Penalties may need to be calculated.
The circumstances that led to the rental income not being declared can also be relevant when considering the penalty position.
Eventually, all of this contributes to the amount being offered to HMRC to settle the disclosure.
So when someone says:
“I’ve worked out the rental income. I just need to tell HMRC what I owe.”
There can still be quite a bit of work between those two points.
For a broader look at the disclosure route itself, you can also read; How Do You Tell HMRC About Undeclared Rental Income? (UK Guide).
Your figures need to tell a coherent story
This is an important part of preparing a disclosure.
The figures shouldn’t exist in isolation.
They need to make sense alongside the information and evidence available.
If HMRC asks how a particular figure was calculated, you should be able to explain the basis for it.
If an expense has been claimed, there should be a reasonable basis for that treatment.
If information isn’t available, that also needs to be dealt with appropriately rather than simply ignored.
The aim isn’t to create a perfect-looking spreadsheet.
It’s to prepare a disclosure that accurately reflects the circumstances and can be explained and supported.
Related video
If you’d prefer to watch, I explain why preparing an undeclared rental income disclosure properly from the outset matters in the video below.
HMRC can still ask questions
Even where considerable care has gone into preparing a disclosure, HMRC can still come back with questions.
I’ve worked on disclosures where relatively little correspondence was required before matters were agreed.
I’ve also had cases where HMRC wanted further information or disagreed with part of the position presented to them.
That doesn’t automatically mean the disclosure was prepared incorrectly.
HMRC is entitled to review the information provided and ask questions.
What matters is being in a position to understand what they’re asking, respond appropriately and support the position you’ve taken where necessary.
Getting professional help isn’t just about doing the maths
This is perhaps one of the most important points.
When someone asks an Accountant or Tax Adviser to help with undeclared rental income, they’re not simply paying somebody to add up a spreadsheet.
They’re asking someone to understand the history, apply the relevant tax rules, review the available evidence, calculate the liability, consider interest and penalties, prepare the disclosure and help deal with HMRC correspondence where that forms part of the engagement.
There is also another part of the process that isn’t always talked about.
The stress.
I’ve worked with people who simply wanted to know that somebody experienced was dealing with the matter properly so they didn’t have to carry it around in their head every day.
That has value too.
Final Thoughts
If you have undeclared rental income and you’ve decided to put things right, that’s an important first step.
But don’t focus solely on getting something submitted as quickly as possible.
Take the time to understand what needs to be disclosed.
Make sure the figures have been calculated using the appropriate rules.
Consider the income, expenses, interest and penalties.
And make sure you understand the basis of the offer you’re making to HMRC.
Because when it comes to an HMRC disclosure;
The goal isn’t simply to submit it. The goal is to get it right.
Need Help With Undeclared Rental Income?
If you have undeclared rental income and you’re unsure how to put matters right, professional advice can help you understand what needs to be disclosed and the steps involved in preparing your position for HMRC.
At Grace Certified Accountants, we work with landlords to understand the history, review the available information and establish the appropriate way forward.
Book a Paid Tax & Property Consultation to discuss your circumstances and understand the next steps..
During the consultation we’ll:
- Understand the history of your property and establish the period that may need to be considered.
- Discuss the rental income, expenses and records you already have available.
- Identify any gaps in the information and what may need to be obtained.
- Talk through what dealing with the undeclared rental income is likely to involve and the appropriate next steps for your circumstances.
You don’t need to have calculated the tax or worked out the disclosure before we speak.
That’s part of understanding what needs to be done properly.