The Non-resident Landlords Scheme is a scheme for taxing the UK rental income of non-resident landlords. The scheme requires UK letting agents to deduct Basic Rate tax from any rent they collect for non-resident landlords unless the agent has authority to pay the particular landlord his rental income gross (without deduction).
Non-resident landlords are persons (this term includes individuals, companies and trustees) who have UK rental income, and a “usual place of abode” outside the UK. Although the scheme refers to ‘non-resident’ landlords, it is usual place of abodeand not non-residence that determines whether a landlord is within the scheme or not. In the case of individuals, the Revenue regards an absence from the UK of 6 months or more as meaning that a person has a usual place of abode outside the UK. It is therefore possible for a person to be resident in the UK yet, for the purposes of the scheme, to have a usual place of abode outside the UK.
When working out the amount to tax, the letting agent can take off deductible expenses and the Inland Revenue will tell an agent not to deduct tax if non-resident landlords have successfully applied for approval to receive rents with no tax deducted. But even though the rent may be paid with no tax deducted, it remains liable to UK tax. So non-resident landlords must include it in any tax return the Inland Revenue sends them.
Applications to receive rent with no tax deducted:
Non-residents who are eligible can apply at any time for approval to receive their UK rental income with no tax deducted. This includes applying before they have left the UK or before the letting has started. Applications should be made on form NRL1 which is available at http://www.hmrc.gov.uk/cnr/nrl1.pdf or by phoning 0151 472 6208/9
Refusal of approval:
The Inland Revenue may refuse approval if they are not satisfied that
(i) the information in the application is correct, or
(ii) the non-resident landlord will comply with their UK tax obligations.
Withdrawal of approval
The Inland Revenue may withdraw approval if
(i)they are no longer satisfied that the information in the application is correct, or
(ii) they are no longer satisfied that the non-resident landlord will comply with their UK tax obligations, or
(iii) the non-resident landlord fails to supply information requested by the Inland Revenue.
The Inland Revenue will tell an agent not to deduct tax if the non-resident landlord has successfully applied for approval to receive rents with no tax deducted. But rent paid with no tax deducted remains liable to UK tax. So non-resident landlords must include it in any tax return the Inland Revenue sends them. All non-resident landlords who receive rents with no tax deducted will have a tax district. Individuals who are not resident in the UK for tax purposes are not sent an annual tax return automatically, even though they have UK rental income. This is because many non-residents will have sufficient UK personal allowances to cover any liability.
Letting agents obligations:
Letting agents that have to operate the Non-resident Landlords Scheme must register with the CNR (on formNRL4), account quarterly for the tax due under the scheme and, by 5 July following the year ended 31 March, complete an annual information return, and where they have deducted tax, give the non-resident landlord a tax deduction certificate NRL6.
The Audit and Pension Schemes Services office carry out audit inspections from time to time to check that letting agents have complied with their obligations under the Non-resident Landlords Scheme. Audit inspections will be conducted within a Code of Practice. The inspection involves checking the records held by the agent. Tax under the Non-resident Landlords Scheme is deducted by letting agents. Letting agents must calculate the amount of tax for each quarter. They then need to apply the basic rate to arrive at the amount of tax due and then pay the tax to the Accounts Office using the quarterly payslip form NRLQ.
Letting agents must generally tax the rental income they pay to non-resident landlords unless the Inland Revenue has told them not to. In calculating the amount to tax, they take into account any ‘deductible expenses’ they pay in a quarter. These are expenses that they can reasonably be satisfied will be allowable for the non-resident landlords when the profits of their rental businesses are computed. [see below for examples]
Letting agents who have to operate the Non-resident Landlords Scheme must send an information return on form NRLY to the Accounts Office by 5 July following the year ended 31 March for which the return is made. Letting agents must show separately for each non-resident landlord (other than those gross-approved by Public Department 1 or South Wales Area office)
(i)the landlord’s name and address
(ii) the amount of rental income for the year to 31 March, before the deduction of expenses and where the letting agent is not authorised to pay rental income to the landlord with no tax deducted
(i) the deductible expenses for the year to 31 March, and
(ii) the total of the tax shown as payable in the letting agent’s quarterly returns for the year to 31 March
where the letting agent is authorised to pay rental income to the landlord with no tax deducted, the landlord’s approval reference number given by the Inland Revenue Residency (authorities issued by Public Department 1 and South Wales Area office do not have approval reference numbers, and there is no need for such landlords to be included on the form NRLY).
Letting agents must pay the tax due each quarter under the Non-resident Landlords Scheme using form NRLQ. Quarterly returns are due for the periods ending 30 June, 30 September, 31 December and 31 March. This form will normally be issued automatically by the Accounts Office.
Letting agents must enter on form NRLQ
(i) the quarter to which the return form relates (where this date has not been pre-printed on the form), and
(ii) the total amount of tax due in respect of all their non-resident landlords for that quarter, or where there is no tax due in the quarter but the letting agent is due a repayment the amount of the repayment claimed.
Letting agents should send the completed form NRLQ and payment for the amount due to the Accounts Office in time to arrive there no later than 30 days after the end of the quarter to which it relates. For example, the form NRLQ for the quarter to 30 September 2004 must arrive at the Accounts Office by 30 October 2004.
Letting agents must keep adequate records to satisfy Inland Revenue auditors that they have complied with their obligations under the scheme. In particular, for each non-resident landlord, letting agents should keep separately
(i) a record of rental income received by the letting agent (showing the date and amount of each payment)
(ii) copies of any correspondence with the landlord regarding their usual place of abode, and unless the letting agent is authorised to pay rental income with no tax deducted,
(iii) a record of expenses paid (showing the date and amount of each payment and a brief description of the expense), and (iv) invoices and receipts (or copies) to provide evidence of expenses paid.
Letting agents should retain records for six years after the end of the year to 31 March to which they relate. Records may be retained on microfilm, microfiche or any other medium which preserves an exact copy of the original. Letting agents who wish to retain documents should contact the Inland Revenue Residency before destroying the originals.
Under the Non-resident Landlords Scheme, tax is payable by letting agents without the need for the Inland Revenue to make tax assessments. But where the Inland Revenue have reason to believe that an amount should have been paid but was not, or a quarterly return is incorrect they can make an assessment. When an assessment is made, the letting agent will be told how they can appeal. Appeals have to be made in writing to the Audit Unit (NRL) within thirty days of the date of the assessment. You can get further information on appeals from the Inland Revenue’s leaflet IR37. Interest is due on amounts paid late. Interest may be charged on assessed income tax from the date when the amount of tax became due until the date it is paid.
How do letting agents register with Inland Revenue Residency?
Letting agents who have to operate the Non-resident Landlords Scheme must register with the Inland Revenue Residency within 30 days of the date on which they are first required to operate the scheme. Letting agents may register by completing form NRL4 and sending it to the Inland Revenue Residency who will send the letting agent a registration number and the appropriate forms and information needed to operate the scheme.
How letting agents calculate the amount to tax.
When calculating the amount to tax, letting agents should add together the rent they actually receive in the quarter plus
– any rent that they had the power to receive, and
– any rent paid away at their direction to another person.
– any deductible expenses that they paid in the quarter, and
– any deductible expenses that were paid away in the quarter at their direction by another person.
It is the date letting agents actually receive/pay the rents (or pay the deductible expenses) that determines when they calculate tax. The periods for which the rents (or expenses) are due are not relevant.
(i) Ensure that adequate information is given to overseas landlords regarding tax system.
(ii) Refer to the provisions within the agency agreement with your landlord and include an authority to retain the appropriate tax (if relevant)
Broadly, in calculating the profits of a rental business, expenses are allowable where they are incurred wholly and exclusively for the purposes of the rental business; and they are not of a ‘capital’ nature.
Examples of expenses paid by letting agents which will normally be allowable expenses include accountancy expenses, advertising costs, cleaning and gardening costs, costs of rent collection, Council Tax while the property is vacant but available for letting, ground rent, insurance on buildings and contents, interest paid on loans to buy land or property or to build or improve premises, legal and professional fees, maintenance charges and repairs which are not significant improvements to the property, including mending broken windows, doors, furniture, cookers, lifts, etc., painting and decorating and replacing roof slates, flashing and gutters.
Letting agents can deduct only those expenses which they pay or which are paid on their direction. This means they cannot deduct:
(i)expenses which the landlord pays, even if they have details of the expenses
(ii) expenses which have accrued in a quarter but which have not been paid in the quarter
(iii) capital allowances, and (iv) any personal allowances due to the landlord.
Administration of Non-resident Landlords Scheme:
The Non-resident Landlords Scheme is administered by the Inland Revenue Residency. Tax is collected by the Accounts Office at Cumbernauld. Non resident landlords can apply to receive their rent with no tax deducted on the basis that either their UK tax affairs are up to date, or they have not had any UK tax obligations before they applied, or they do not expect to be liable to UK income tax for the year in which they apply. When approval has been given, the Inland Revenue sends: (i) a notice of approval to receive rent with no tax deducted to the non-resident landlord, and (ii) a separate notice to the letting agents named on the application form authorising them to pay rent to the non-resident landlord without deducting tax.
Authority to pay rent to a non-resident landlord with no tax deducted is generally backdated to the beginning of the quarter in which the Inland Revenue receives the non-resident landlord’s application. As the tax year for the Non-resident Landlords Scheme starts on 1 April, the quarters are the three-month periods that end on 30 June, 30 September, 31 December and 31 March. So if a non-resident landlord applies on, say, 20 September, the authority sent to his letting agent will usually take effect from 1 July.