Why is HMRC contacting companies?

HMRC has received a large amount of information regarding non-UK companies holding UK property via the Register of Overseas Entities (ROE), introduced in 2022. The ROE was part of an effort to tackle economic crime in the UK by increasing transparency of who owns land and property in the UK. Overseas entities holding UK property or land (both residential and commercial) must provide certain information regarding the entity, its UK property interests, and its beneficial owners to the ROE. Overseas entities include non-resident companies, non-UK trusts, and some partnerships.

While HMRC now has access to swathes of new data on holders of UK property, this information doesn’t necessarily give them the whole picture – for instance the ROE does not require any information about income from properties to be disclosed. HMRC’s letter campaign therefore intends to prompt companies to disclose any outstanding UK tax liabilities from UK rental income.

What action is needed?

If a company has historically received, or currently receives, UK rental income, as a starting point the rental profits are subject to UK tax. Previously, such rental profits were subject to Income Tax but from 6 April 2020 are subject instead to Corporation Tax under the Non-Resident Landlord Scheme.

If a company has undeclared UK tax liabilities, it may need to make a disclosure and may face penalties. HMRC requires disclosure to be made within 40 days of receipt of the letter, though extensions to this deadline may be negotiated. There may also be interactions with VAT and the Transfers Of Assets Abroad legislation where UK-resident individuals are shareholders. Professional tax advice may therefore be helpful in navigating the process of disclosure and any additional complexities.

The letter warns that, if no disclosure is made, HMRC may take further steps to assess or investigate the tax liability. Some companies being contacted may not have any tax to disclose, for example if a company does not let out the commercial property it owns or has already paid tax, but which has not been properly connected with the company by HMRC. While a disclosure may not be required, proactive communication with HMRC can help prevent escalation of the issue.

HMRC’s evolving compliance approach

These letters are part of a wider communication trend from HMRC of using ‘One-to-many’ (OTM) letters, also known as nudge letters – a letter sent to multiple individuals or entities regarding an issue. While formal enquiries and compliance checks relate to a specific risk or aspect that HMRC has identified about that taxpayer, OTM letter campaigns often have a much wider audience. HMRC views OTM letters both as a way to influence taxpayer behaviour and as an educational resource.

We have seen an upturn in OTM activity over the past few years, as such campaigns are a cost-efficient way for HMRC to contact many taxpayers at once without the administration of opening a compliance check. Currently the tone and actions required from taxpayers vary between letter campaigns. It is also unclear how receiving a OTM letter affects whether a disclosure is prompted or unprompted, which may change the behavioural penalties involved. It would be desirable for HMRC to move towards more standardised formats of OTM letter as the approach becomes more ingrained.

Would you like to know more?

If you would like to discuss any of the above issues or have received a letter in HMRC’s recent property campaign, please get in touch with your usual Blick Rothenberg contact or Heather Powell via the form below. You can also visit our Property Hub, where you can find insights and articles into current news around the property industry.