Airbnb property owners could well be facing large penalties if they are discovered to have not paid tax on any income generated by letting their properties. Any unpaid tax must be corrected before 30 September 2018 or be subject to a minimum penalty of 100% of the unpaid tax, effectively doubling its value.
HMRC’s ‘Requirement to Correct’ (RTC) regime requires taxpayers to declare and settle any unpaid UK tax relating to offshore assets before the 30th September 2018. Beyond this date, if HMRC find unpaid UK tax liabilities, a default penalty of 200% of the tax due will be charged. However, the penalty can be reduced by cooperating with HMRC, but the minimum penalty will be 100% of the unpaid tax.
What is the purpose of the regime?
The regime was introduced with effect from 6 April 2017 in advance of HMRC gaining access to more data, shared by other jurisdictions, in respect of the offshore tax affairs of UK residents. Under the Common Reporting Standard, transactions regarding any Airbnb properties owned by UK residents are likely to be visible to HMRC.
How and where individuals could have made mistakes
This regime could catch some Airbnb owners from the UK out, as it targets unpaid tax liabilities, relating to offshore assets, dating back to 1998. For example, even if a UK resident has rented out an overseas property for a few weeks of the year, these earnings must be disclosed to HMRC each year. If this has not been done correctly in the past, a penalty will be applied to the total of the tax due. Whilst these individual amounts might be small, the accumulated tax, penalties and interest could result in a significant sum payable to HMRC.
On the other hand, individuals could have arrived from abroad to live in the UK and be unfamiliar with the domestic tax system. For example, many offshore jurisdictions don’t charge tax on non-local income and gains, thus individuals taking up residency in the UK could wrongly assume these rules are the same in the UK. In alternative situations, non-doms who are UK residents may have received inaccurate or incomplete advice in this area and be unaware of their liabilities.
This is a final warning from HMRC as it follows a number of previous initiatives to encourage people to step forward and declare they have unpaid offshore tax liabilities, such as the Liechtenstein Disclosure Facility. In addition to these penalties for unpaid offshore tax liabilities, HMRC have the power to name and shame individuals who fail to pay, if their liabilities amount to £25,000+. Thus, failing to disclose these liabilities now, could incur both financial and reputational costs.
If in doubt taxpayers should seek advice about their offshore tax arrangements now. Even those individuals with rather straightforward tax affairs could have unpaid tax liabilities related to investments in offshore trusts, unit trusts or offshore businesses. In some cases, individuals could have inherited investments of this nature, unaware of the tax implications they may bring.
Russell Dickie is a Senior Manager and offshore tax specialist. If you think you’re at risk of HMRC’s ‘Requirement to correct’ regime, contact Russell by phone on +44 (0)1784 497212 or via email on RDickie@menzies.co.uk.