Undeclared Rents: Years in Scope, Behaviour and an Instruction to Lie
Priya has been your firm's client for two years. While preparing her 2024/25 return in June 2025 you find that she has owned and let a UK flat since 2019/20, receiving rents of £24,000 a year with allowable expenses of £6,000 a year. None of it has ever been declared. Priya says her previous adviser told her the income was "not worth reporting because it was let at cost to a friend". She now asks you to leave it out "and see what happens", and separately asks whether HMRC can "only go back four years anyway". Her other income puts her in the 40% band in every year. She has never been contacted by HMRC.
1. Identify which tax years are in scope, and the tax at stake, and correct Priya's assumption about the four-year limit.
Read the worked answer
Profit per year
24,000 − 6,000 = £18,000; tax at 40% = £7,200 per year.
Years in scope - it depends on behaviour
The assessment time limits (TMA 1970 s.36) are:
| Behaviour | Limit |
|---|---|
| Innocent error | 4 years after the end of the tax year |
| Careless | 6 years |
| Deliberate | 20 years |
So "four years" is wrong on two counts: it is six years for carelessness and twenty for deliberate conduct. In every realistic scenario the whole period since 2019/20 is open.
Application
- 2024/25: the return has not been filed. This is not an inaccuracy in a document; simply report the correct figures. No inaccuracy penalty arises, but the £7,200 is due with the normal filing/payment date and interest runs from then.
- 2019/20 to 2023/24: five filed returns containing an inaccuracy. If careless, the six-year window reaches back to 2019/20; if deliberate, all five years are open.
Tax at stake
- Five filed years: 5 × 7,200 = £36,000
- Plus 2024/25: £7,200
- Total £43,200, plus late payment interest from each original due date (interest is not deductible).
If she were right about four years, only £28,800 would be at stake - so getting the behaviour categorisation right is worth £14,400 before penalties even start.
2. Analyse the behaviour category, the penalty range and the effect of disclosure, with figures.
Read the worked answer
Behaviour
- She was aware of the rental income: she received it and told her previous adviser about the letting, describing it as "at cost". An incomplete description given with knowledge is not innocent, and it is more than careless.
- There is no concealment in the technical sense (no false invoices, no off-book receipts, no active hiding) - the income was simply omitted from returns she signed.
- Category: deliberate but not concealed.
Penalty range
| Category | Range | Prompted minimum |
|---|---|---|
| Careless | 0–30% | 15% |
| Deliberate not concealed | 20–70% | 35% |
| Deliberate and concealed | 30–100% | 50% |
Disclosure reduction
- Telling: up to 30%
- Helping: up to 40%
- Giving access: up to 30%
The reduction is applied to the difference between the maximum and minimum of the range. A full unprompted disclosure with maximum cooperation takes the penalty to the bottom of the range (20%).
Indicative numbers on £36,000 of potential lost revenue (the five filed years)
- Full unprompted disclosure, full cooperation: 20% → £7,200
- Prompted, minimum (35%) → £12,600
- Maximum (70%) → £25,200
The spread is £18,000 - far more than any fee for making a disclosure. The behaviour argument therefore matters twice: it sets the range and the assessment window.
Can she blame the adviser?
Only if she gave complete and accurate information and reasonably relied on competent advice. She did not: she described a letting business as "at cost". Reasonable care cannot be built on a misdescription, so the careless category is unlikely to be available to her.
3. Priya instructs you to leave the income out. Set out what you must do, in order, and the professional and money-laundering consequences.
Read the worked answer
Step 1 – Do not prepare or file the return as instructed
You cannot sign, or be associated with, a return you know to be materially incorrect. Integrity and compliance with the law are fundamental principles; an agent must not allow a client to believe that non-compliance is an option.
Step 2 – Advise in writing, with numbers
Set out: the £43,200 of tax plus interest; the penalty range (£7,200 to £25,200 on the filed years, and the risk of the deliberate-and-concealed category if the omission continues); the assessment windows; and the fact that an unprompted disclosure is materially cheaper than a prompted one. Recommend a disclosure (HMRC's Let Property Campaign is designed for this profile) and offer to make it.
Step 3 – If she refuses
- You must not act in relation to the inaccurate return and must not allow it to be filed with your firm's name on it.
- Consider whether you can continue to act on any matter. Where the same client is likely to file further inaccurate documents, the firm should cease to act, confirming in writing, and hand over records to which she is entitled.
- You may tell HMRC that you no longer act (without disclosing confidential client information) so that HMRC writes to the client directly.
Step 4 – Money laundering
An intentionally undeclared rental stream is a suspected tax evasion offence and the rents are criminal property. Under the Money Laundering Regulations 2017 you must make an internal report to the firm's MLRO, who decides whether a suspicious activity report goes to the NCA. You must not tip off the client that a report has been or may be made - that is a criminal offence. Client confidentiality and legal privilege do not override this.
Step 5 – Record everything
Document the advice given, the client's decision and the firm's position. If the matter is later challenged, the file is the firm's defence against an allegation that it facilitated the inaccuracy.