The warning bell was sounded by Mortgages For Business managing director David Whittaker at The Specialist Lending Event in Harrogate this week. He said unless brokers acted to educate their clients on the perils of filing untruthful tax returns, it could be more than the landlord’s neck on the line if HMRC decided to take a closer look.
The Prudential Regulation Authority (PRA) wants buy-to-let mortgage lenders, which offer loans to landlords with four or mortgaged properties, to carry out specialised underwriting from 30 September. Examining historical and projected cash flows is one layer of the assessment the PRA expects to see from lenders. Whittaker sees this as indicative of the PRA’s attitude towards portfolio lending, pointing out that if the regulator is looking for more visibility of income, the logical progression of this objective is to stipulate that landlords must provide tax returns to lenders.
“If this comes to pass, it is likely that brokers will be looking at returns which declare far lower taxable profits than the landlord is declaring on the mortgage application,” he said.
Whittaker said any broker questioning what they should do if they find themselves in this predicament faces a simple answer, “brokers involved in the chain have a legal responsibility to report this.” If it reaches the lender, said Whittaker, they may choose to give the intermediary and landlord the benefit of the doubt and ask them to explain why the documents don’t match, but there is a risk the lender may ‘shoot first and ask questions later’.
“Before you know it, the broker has been struck off by the FCA [Financial Conduct Authority] for willingly and knowingly being party to tax evasion and proceeds of crime,” he added.
The issue, however, does not need to escalate to such drastic heights. In the autumn of 2013, HMRC launched a campaign which allows landlords to get their tax affairs in order. The Let Property campaign offers landlords the best possible terms to settle up their tax liability but these terms still include interest and penalties if they are due. A spokesperson for HMRC confirmed that if disclosures were voluntary, penalties would be mitigated accordingly.
He added: “Those who don’t make a voluntary disclosure may be charged higher penalties, or face criminal prosecution.”
Landlords are responsible for calculating their own tax liability but HMRC can provide support including a tax calculator, case studies, guidance, a digital disclosure service and a dedicated phoneline.