UHY Hacker Young a top UHY Hacker Young a network of accountancy firms incorporating over 88 partners reports that HM Revenue and Customs appear to be adopting a new technique of trawling HMLR data to discover under reporting of capital gains in tax returns when properties have been bought or sold.
Geoff Davies, Partner at UHY Hacker Young stated “CGT enquiries focused on residential properties have become much more common recently and HMRC has clearly stated in enquiry correspondence that it has obtained information on taxpayers from the Land Registry, which is something we have not heard before”.
UHY Hacker Young went on to say “says that in a significant number of recent enquiries HMRC has argued that taxpayers have incorrectly offset some costs spent improving properties against CGT. Taxpayers are allowed to deduct the cost of work on a property from their CGT bill, but such work must be considered ‘enhancement expenditure’ and not maintenance”
Geoff Davies explained “HMRC often argues that some costs are repair costs and not enhancement to the property, which regularly leads to disagreement during the course of an enquiry.”
Some taxpayers according to UHY Hacker Young, who have bought and sold many properties over a short period of time could face massive tax bills even if they have paid the correct amount of CGT.
This is because HMRC could claim that taxpayers who regularly carry out this type of activity are in fact engaged in a trade (property development) and therefore liable to Income Tax and National Insurance.
Geoff Davies explains: “Taxpayers who buy, renovate and sell properties without letting them could be considered property developers. Any gains would therefore be taxable as income. The difference between CGT and Income Tax at the moment would mean a massive increase in the amount of tax they would have to pay.”
A press office from HMRC stated that they have always used this data as part of the techniques that they use in investigating tax issues and that the use of HMLR data is nothing new nor being ramped up.