HM Revenue & Customs ("HMRC") inspectors will once again be looking for budding entrepreneurs who are expecting to make money out of Wimbledon and other summer sporting events and this year they will almost certainly be using their artificial intelligence system Connect to check up on extra earnings say Blick Rothenberg.
'They are using their system far more than ever before. It enables them to compare information from different sources to check whether income and gains have been reported on tax returns', said Fiona Fernie, a tax risk and dispute resolution partner at Blick Rothenberg.
Connect automatically collates information from over 30 databases including details of tax payers salaries, bank accounts, loans, property and car ownership. HMRC also has the power to request one-off bulk data from third parties where there may be cause for concern. The system allows HMRC to look at taxpayers' day to day activities even down to ticket sales and passenger information supplied by airlines.
Stefanie Tremain, a senior manager at the firm, said, 'Summer sporting events often provide opportunities for enterprising individuals to make extra money, but even with the hot weather taxpayers should also be careful that the taxman doesn’t rain on their parade.'
She added, 'The trading allowance exempts the first £1,000 of trading income per annum and would cover, for example, selling strawberries or bottled water from outside your home. The second allowance covers the first £1,000 of rental income, which would include income from letting out parking spaces or driveways as pitches for traders.'
'If your income exceeds these allowances, you may need to register for self assessment.'
For those individuals renting out rooms in their own homes the income can be tax-free provided it doesn’t exceed certain thresholds. Stefanie explained, 'Many people could be on to a real winner as renting their house out for two weeks in a sought after area could pay the mortgage for the whole year. For example, during the tournament fortnight Wimbledon properties are being rented from £1,120 a week for a one-bedroom apartment to £7,000 a week for a four bed roomed house. However, this income may need to be declared to HMRC.'
The ‘Rent-a-Room’ scheme generally applies to owner-occupiers and tenants who receive rent from letting furnished accommodation in their only or main home but can also be claimed by those running bed and breakfasts or guesthouses. The relief is separate to the rental income allowance and the two cannot be used together.
Stefanie said, 'Gross receipts of up to £7,500 may be earned before tax is due. This limit applies to a tax year and whilst it can be reduced to £3,750 if the property is owned jointly, it is not reduced according to the letting period. Under the scheme, expenses cannot be deducted from the gross income and any excess income above the £7,500 is taxable. The alternative method available to taxpayers is to tax all rental income and claim deductions for expenses.
'For those individuals, who are already registered for self assessment, any rental income must be reported on their annual tax return regardless of whether the ‘Rent-a-Room’ scheme applies and the appropriate box should be ticked. For those not already in Self Assessment and whose rents are below the relief threshold, the exemption applies automatically and it is not necessary to register.'
Following a consultation on the Rent-a-Room scheme, HMRC intend to introduce a new shared occupancy test from 6 April 2019, which means that the relief would only be available to taxpayers who are living and physically present in the property during some part of the letting period. This may therefore be one of the last opportunities for short term lets of whole properties to benefit from the relief.
Points to be aware of:
- Be clear on the difference between “trading” and rental income. Any income received by virtue of letting property or land is taxed as rental income.
- Each individual has a personal allowance of £11,850, which is available to be offset against all taxable income. An additional £1,000 allowance should be available to offset against trading income and a further £1,000 allowance should be available to offset against ad hoc rental income.
- For those renting out a room in their main residence, the first £7,500 of rental income is exempt under Rent-a-Room relief.
- Taxpayers should be aware that once these allowances are exceeded, the income may need to be reported to HMRC as the penalties for failing to do so can be significant. For those taxpayers not in self assesment the deadline to register is six months after the end of the relevant tax year (by 5 October 2019 for income earned in the 2018/19 tax year). The penalties for submitting a late tax return start at £100, rising to £1,000 plus 5% of any tax due depending on the date of submission.
- Interest will be charged on late payments of tax and late payment penalties may also be charged of up to 10% of the tax due.
For more information, please contact Fiona Fernie or Stefanie Tremain.