Recent reports about the extent of potential under-declaration of tax in the London Borough of Newham make grim reading. The borough has 27,000 registered landlords but, when it provided the names to HMRC, it was found that 13,000 of them (almost half) had not registered for self-assessment. The council estimated that this meant that something like £200m of tax was being lost in London alone. Trying to get a handle on the true scale of the problem is difficult - but that has never stopped us from trying.
First, the 13,000 are reported as not registering for self-assessment. That does not necessarily mean that they are not paying tax. There is an obligation to notify HMRC of rental income, but where this is small (gross income of less than £10,000 and net income after expenses of less than £2,500) the income can be collected under PAYE and not under self-assessment. Given that the average gross rent in Newham is £1,387 per month, or £16,644 per year it is not likely that many people will be in this situation. Similarly, if you rent out a room in your house, the first £7,500 of rent is tax-free and if the total amount is less than that you don't have to declare the income. There may be a number of people within the 13,000 who are within the rent-a-room scheme, but it is unlikely to be many.
What else might be behind the statistics?
Well there is bound to be some error, for example where names are not properly matched up between the council and HMRC. There may be cases where the landlord is operating though a company and therefore would not show up in the self-assessment statistics. Some properties may be owned by partnerships or trusts, which again may not quite match the way that HMRC classifies income. But strip all of this away and you are still left with what seems to be a massive problem. Let's assume that 10,000 of the 13,000 are actually receiving rent which is not declared. With the average rent I quoted above, that would be over £166m of gross rents going unaccounted for. Now we stressed before, in the context of the taxation of multi-nationals, that turnover is not profit. So, let’s be generous and say that, after taking account of agents’ fees, mortgage interest relief and other costs, the profit is only 10 per cent of the rents. That would be £16m of profits escaping tax. Let’s apply an average rate of 30 per cent to this by assuming that half of the profits are earned by basic-rate taxpayers and half by those taxed at the higher rate, which comes to £4.8m. That's one London borough alone. Given that there are estimated to be up to two million private landlords in the UK this is clearly the tip of a very big iceberg. How large it is can only be a matter of speculation as the data is simply not there to make anything other than guesses, but it’s clearly a huge number.
So, what is to be done?
The Newham experience is a salutary reminder of the power of linking up data and we applaud it. We have said many times in this brief that evasion needs to be tackled vigorously and systematically by HMRC. It will be interesting to see if the worst offenders face prosecution, as they certainly ought to.