LandlordZONE founder Tom Entwistle talks about the possibility of HMRC spot checks – “fishing expeditions” – what they mean for you and how to be prepared.
This is something of which I’ve had personal experience. Some years ago, I opened a letter from HMRC. It was asking me to send my last year’s accounts, business and personal bank statements, invoices and business and personal credit card statements to a tax inspector, in Aberdeen of all places.
Having recovered from my mild shock, I picked up the phone and dialled the number on the letter. Sure enough, the inspector wanted everything, all to be parcelled up and sent off to Aberdeen, plus as he explained, the next stage would be a telephone interview, an interview at my premises and if necessary, a full investigation.
Next, I phoned my accountant. He stated categorically, “they’re not having all that”. He explained that they weren’t going to get all of this: they would simply be sent a copy of my last year’s business accounts. “Leave it with me” he said, “I’ll speak to them”, with your permission we’ll send them the Sage accounts for last year on disc.
I put it out of my mind, I wasn’t particularly worried as we knew everything was above board and ultimately, I thought, I could justify everything. Three months went by and nothing. Then I received a message from my accountant telling me that HMRC had contacted him saying they had lost the disc! Could we send it on Drop Box?
He wasn’t too happy about it for security, but I said yes, and it wasn’t long after that I got a letter saying, “case dropped”. It was a great letter to receive and a great compliment to my bookkeeper who was ultra capable, and she had everything spot on. My accountant explained that HMRC runs these discs through an “AI sieve”, which immediately flags up if there are any suspicious accounting entries.
I still got a hefty bill from my accountant for his expertise, but it was worth every penny. They saved me from a far more stressful process. Just imagine the work, stress and expense if my accounts had been in total chaos!
It’s everyone’s nightmare: a brown envelope letter from HMRC drops through the letter box asking you to respond to a tax inspector somewhere in the UK, to explain your income and all transactions: to provide your accounts, invoices and bank statements.
These so-called compliance checks — sometimes referred to as “fishing expeditions” — are happening more often, and they can arrive completely out of the blue. You don’t need to have done anything wrong to get one. But if your books aren’t in order, or if you’ve even made innocent mistakes, the experience can quickly become stressful and expensive.
So, what are these checks, why are landlords being targeted, and how can you prepare yourself to avoid sleepless nights?
The government is putting HMRC under constant pressure to close the UK’s “tax gap” — that’s the difference between what HMRC believes it should be collecting and what makes it into the Treasury’s coffers. The latest available figures show that in 2023/24 this gap was estimated at around £46.8 billion or 5.3% of the total tax take, with property income representing a significant portion of that (HMRC, Measuring the Tax Gaps 2025).
For many years, property letting was notorious for under-reporting. Casual landlords — those with one or two buy-to-let properties as a sideline to a day job — often didn’t keep proper books. They often collected rents in cash, and they were largely ignorant of the proper tax reporting procedures. They simply assumed HMRC would never notice.
Today, HMRC have got far more savvy at monitoring and tracking down unreported rental income and other property related tax dues. The old days are over. They now have sophisticated digital tools to make it almost impossible to “hide under the radar”. They monitor these sources of income closely. They connect between government departments which never happened before, and they use:
Another little appreciated major source of information for HMRC is phone ins. They rely on reports from third parties: jealous neighbours, disgruntled partners and spouses when splitting and divorcing etc.
The fact that landlords are a politically easy target - few people sympathise with “wealthy landlords” or “tax-dodging landlords” - and it’s no surprise HMRC is receiving information and increasingly applying pressure.
A compliance check usually begins with a formal letter. It may say HMRC has information suggesting undeclared income, or it may simply be a “random review.” Either way, the implications are the same, the pressure is on and you’re being asked to prove that your accounts stack up.
Typically, the letter will politely request:
Usually, you’ll have 30 days to respond. If you ignore the request, penalties can follow very quickly. There are two types of inquiries and it’s important to understand the difference as obviously the former is more concerning than the latter:
Both are concerning and must not be taken lightly. Your response should be swift and you should comply completely with the request.
Landlords often believe that because they’re doing anything wrong, “not trying to dodge tax” they have nothing to worry about. Unfortunately, the way it works is, HMRC penalties don’t always depend on intent alone.
The claimed expenses trap: A landlord replaces a kitchen and claims the cost as “repairs.” HMRC argues they are “improvements” and disallows the deduction. But the landlord can’t find the invoices for the work, and without these to break down the work to its essentials, it’s impossible to challenge HMRC. The landlord is facing a large bill for back tax, plus a penalty for her “careless error.”
A homeowner landlord doing short Airbnb lets rents a room through Airbnb, earning £10,500 last tax year. He has assumed the income is tax-free under the “Rent a Room” scheme, but he forgot the allowance only covers the main residence. HMRC spots the listing, issues a compliance check, and the landlord ends up paying tax the back tax plus a late payment interest.
A son inherits his mother’s flat and lets it out, assuming his solicitor will “sort out the finances”. Two years down the line HMRC picks up the rental with undeclared income and writes asking for undeclared rental income to be paid. Because disclosure was late, the penalties are higher.
None of these landlords set out to cheat the system — but HMRC still collected tax, penalties and interest. In other cases, landlords have deliberately set out to cheat and of course the consequences of that are potentially much more severe.
The tax burden on residential property landlords has progressively increased over the last 10 years, most notably the 2017 phasing out of deductions for loan interest in calculating taxable profits from a residential (not commercial) property rental business.
This has encouraged some organisations to develop schemes for landlords who seek to avoid these tax liabilities. These schemes are invariably a sham. These schemes are done through a rather complex process of transferring ownership using the interim step of transferring the property business to an LLP and then to a company.
The schemes do not comply and HMRC have sent out “Spotlight letters”, warnings telling landlords that HMRC will recover outstanding tax, interest and penalties if the schemes are used.
A - Poor record-keeping is a primary and fundamental error. Relying on memory, incomplete records and lost invoices and receipts is a mistake. Bookkeeping for a rentals business is very simple and falls into three stages:
Making tax digital coming soon is perhaps a good thing in this regard. It will discipline landlords – those who meet the criteria – to use the appropriate software and prepare their accounts and submit them to HMRC on a quarterly basis.
B – You must understand the rules such as the difference between repairs and improvements, mortgage interest relief can only be claimed on interest and not capital payments, and from April 2020 only a basic rate tax credit applies. The rent-a-room scheme and furnished holiday letting rules can be complicated.
Using an accountant to advise on these matters is well worthwhile and they are especially important sources of help should you receive one of those HMRC letters.
C - Failure to declare taxable income, which is common for landlords with lodgers, those letting through Airbnb, when they inherit properties, or when they have overseas lettings. You might think that HMRC will not spot these sources of income, but don’t bank on it, the consequences are serious.
HMRC’s penalty regime is a tough one: up to 30% of unpaid tax for “careless errors”, up to 70% for “deliberate but not concealed” and up to 100% for deliberate concealment – see HMRC’s Compliance Handbook. It’s unforgiving, even when you can argue for leniency, you’ll still face interest on any late tax. Tax evasion as opposed to tax avoidance, is a criminal offence.
Treat all your lettings as a business, even if it’s just a lodger or a single buy-to-let.
Keep good records, at the very least a cash ledger, all receipts and invoices showing what comes in and what goes out each tax year. A spread sheet is a useful alternative and if you have more rentals, a proprietary accounting software package, preferably a Making Tax Digital compliant one, is best of all.
Avoid cash payments and receipts so that all your transactions are easily traceable and transparent through your bank statements and file all your receipts, bank statements invoices, tenancy agreements and any service contracts, securely.
Understand what you can and can’t claim for. HMRC’s “Property Income Manual” is the definitive online guide, but better stiff use a qualified and experienced accountant.
Plan now for Making Tax Digital (MTD) as the qualifying amount of income is gradually coming down and most landlords will be affected. Next year landlords with income over £50,000 will need to file quarterly digital returns from April 2026 but you can enter the scheme voluntarily even if your income is well below that.
Ask yourself – if you received a letter from HMRC tomorrow, asking for all your accounts and statements etc, could you easily present them in an organised format?
Increasing compliance checks by HMRC are not an isolated incident, they are part of a wider trend affecting rentals businesses. Landlords are facing tougher rules across the piece with the imminent passing of the Renters’ Rights Bill and with its Decent Homes Standard. There are more local councils out there introducing selective licensing schemes and the Minimum Energy Efficiency Standards (MEES) are gradually being tightened.
Tax compliance is just one aspect of a more professional approach to letting property, expected of all landlords. The days of casual, “back-of-an-envelope” management rentals business management are fast disappearing.
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