Research and analysis

Income from property: Testing a proof of concept

Published 17 May 2022

Qualitative research with landlords and letting agents on reactions to a proposed withholding concept.

HM Revenue and Customs (HMRC) Research Report 647

Research conducted by Solutions Strategy Research Facilitation Limited in January and February 2016, the findings in this report reflect the attitudes of participants at the time it was conducted. Prepared by Solutions Strategy Research Facilitation Limited (Caroline Partridge and Philip Wilson) for HMRC.

Disclaimer: The views in this report are the authors’ own and do not necessarily reflect those of HMRC.

1. Research requirement (background to the project)

UK resident landlords may currently be paid their rent without tax deduction at source, which can result in issues such as income from property not being reported or being reported incorrectly. Poor reporting may comprise genuine error, and, in some cases, evasion or deliberate tax fraud. Many use Self Assessment to report income, making it difficult for HMRC to identify all landlords and customers who are in receipt of income from property, and to detect fraud and error.

This research assessed the concept of an alternative ‘voluntary withholding process to UK resident landlords, whereby a letting agent would administer and collect tax on income from property on their behalf and pass this to HMRC directly’. The proposed scheme was loosely based on the established Non-Resident Landlord Scheme already administered by some letting agents.

The project objectives were as follows:

• to understand current experience of renting out a property and where any tax issues lie
• to identify barriers, support, and guidance needs
• to assess potential appetite (take up) of this new way of collecting tax on rental income, including barriers and incentives around the new system and any impacts on the current relationship between a landlord, letting agents and their tax advisor because of proposed changes
• to establish any other dependencies, and/or undesired impacts on customer groups such as renters, vulnerable groups, those in social housing
• to provide any other suggestions from the customers groups around improving their experience of tax administration and collection from property irrespective of the proposed concept

1.1 When the research took place

Research was carried out in January and February 2016.

1.2 Who did the work (research agency)

The work was carried out by Caroline Partridge and Philip Wilson of Solutions Strategy Research Facilitation Limited.

1.3 Method, data, and tools used, sample

This qualitative research included 20 depth interviews with letting agents and a mix of depths, pairs, and mini focus groups with 54 landlords. Landlords ranged from those owning between 1 and 15 properties.

The research was undertaken in 4 stages, to allow for stimulus and discussion guide iteration between stages.

Stages 1 to 3 introduced the new concept before any mention of the Personal Tax Account (PTA), an online account through which customers can manage their tax affairs.

Stage 4 reversed this and introduced the idea of the PTA before introducing the new concept. This was done to test whether a different positioning helped the appeal of the concept, presenting it in the context, reframed as following on from the idea of the PTA. The key point of the research was however the income from property withholding concept, not the PTA.

Stimulus materials

Participants were presented with the new proposed withholding concept in steps through a number of separate statements to help isolate responses to different elements.

The full method and sample were as follows:

• stage 1: 11 depth interviews with landlords and 5 paired depths with landlords and spouses/partners who co-manage property

• stage 2 / 3 (undertaken concurrently): 6 mini-groups with landlords and 16 depth interviews with letting agents

• stage 4: 8 depth interviews with landlords and 4 depth interviews with letting agents

Research was carried out across a mix of locations in London, Manchester, Sheffield, Leicester, Birmingham, Bristol, and Cardiff.

2. Main findings

2.1 Audience insights: landlords

During the research with landlords, six broad audience types emerged, based on their reasons for investment and use of letting agents, as shown below. It should be noted that landlords could shift between audience types over the course of their journey as a landlord. The six broad audience types identified were:

• accidental landlords: have typically acquired property through inheritance, marriage, or divorce, and some use full service letting agent for convenience
• it’s a business: own a large portfolio of income-generating properties, and have other financial interests, and regularly use a full-service letting agent as it would be too time consuming to manage their own property
• first and only let: have deliberately acquired one property as an investment, driven by the assumption the property would increase in value and use letting agents as a one-off to find tenants, to keep costs to a minimum
• portfolio start up: seek limited profit on their income from property, to reinvest in more property and use letting agents as a one-off to find tenants to keep costs to a minimum, but may consider a full-service letting agent if portfolio grows too big to manage
• builder landlords: builders by trade who often started out renovating and selling properties and have moved into Buy to Let and use letting agents as a one-off to find tenants as feel they are fully competent to maintain properties themselves, or through their own contacts
• letting agent landlords: have professional insight to optimise return on investment through right choices and use their own contacts and expertise to manage property

2.2 Paying tax on income from property – Self Assessment

The research included both landlords who completed their own Self Assessment return, and those who employed an accountant to complete on their behalf. Those who completed their own Self Assessment return generally reported that, after initially finding it daunting, they now found the online yearly process quite simple.

Landlords who used accountants often received income from other sources, such as from their own or partner’s business.

2.3 Landlord responses to the Personal Tax Account (PTA)

The concept of the Personal Tax Account was generally positively received, and a few landlords were already aware of an online account. The idea generally made sense to landlords, even to those who described themselves as digitally unconfident, and was seen to mirror the way financial transactions are conducted with other organisations.

Comparisons were made with online banking and setting up direct debits with utilities and other companies online. As such, by introducing the PTA, HMRC was seen to be adopting contemporary practices that, for many, were part of the norm. It was seen as a way of putting individuals in control of their tax affairs and managing these in a modern way.

Most participants foresaw no reason why they would not want to use the PTA, although some did have reservations about whether it would require more time and effort than their current system. The key benefits were seen to be its simplicity, with all tax affairs joined up in one place, leading to less potential for error, and making it easier to track and follow any dealings with HMRC.

It was also seen to have the potential to more accurately record tax, therefore reducing the need for other contact with HMRC (such as long calls to resolve errors or misunderstandings). The PTA was also seen to be a more efficient, faster system, which could reduce the administration burden for the taxpayer, with more transparency.

However, participants’ understanding of the PTA, as presented in this research, was seen to negate the need for the proposed withholding scheme. Participants could see no need for letting agent involvement when they would soon have the power or obligation to input tax details themselves.

2.4 Landlord responses to the idea of collecting tax monthly

The idea of collecting tax monthly was not unexpected. For most, it made sense that HMRC would want to move to this model rather than having to wait 12 months or more to collect owed tax, and monthly collection was seen to be in line with how some other modern financial transactions are conducted such as subscriptions and Pay As You Earn (PAYE).

Landlords who liked the idea could spontaneously see benefits. Some who were well-organised and already inputted financial information in real time, for example onto their own spreadsheets, felt this would be easy and a good fit with their preferred method of recording information.

Some also saw the idea as a way to avoid using an accountant at year-end. These landlords tended to have relatively simple tax affairs, low maintenance costs, and a low tax bill. However, those with higher or variable yearly tax bills, and those that did not update information in real time could see the benefit in avoiding a large yearly bill that they found hard to save for. Therefore, paying tax monthly was seen to make it easier to plan, budget and control their finances.

However, others perceived the idea more negatively. Some of the landlords who reported having good control over their finances and already planned and budgeted well, preferred to earn interest on the money for the year, or needed the flexible cash flow created by being able to defer tax payment for a year.

Others who did not like the yearly Self Assessment process and found it difficult reported that they would prefer the process to be annual and the idea of having to go through what they perceived to be an onerous and time-consuming process every month was not well-received.

2.5 Landlord responses to the new withholding concept

Landlords tended to respond negatively towards the new Income from Property Tax Scheme where the letting agent deducts and pays tax on behalf of the landlord. There was near-universal spontaneous rejection of the concept, although some did think that the concept may work for other landlords. This was consistent across all stages of research, including stage 4, where the PTA was explained before the new withholding concept.

There were several reasons for this rejection. The main reason given was that landlords perceived there to be a disconnect between ‘the tax arena’ and letting agents. Letting agents’ area of expertise was seen to be property management, and they were not viewed as accredited tax experts with a professional requirement to report tax correctly in the same way that accountants and bookkeepers were.

In addition, a number of landlords expressed a lack of trust of letting agents which meant that they did not want them to administer financial payments. A common spontaneously raised concern was who would be accountable if a letting agent failed to pay the tax to HMRC, or if a tenant defaulted on rent, and whether landlords would be accountable for letting agent fraud or error.

This lack of trust also extended to an unwillingness to give letting agent’s personal financial information. The system was described to participants (in research sessions) as the agents inputting details such as rent and expenses, and HMRC reporting back how much tax to withhold based on HMRC’s knowledge of a landlord’s other financial affairs. This level of detail, a tax amount based on other financial circumstances, was felt to reveal too much of the landlord’s financial circumstances to letting agents.

Landlords voiced concerns about letting agents using the information about income as an excuse to offer other financial services. However, landlords were also concerned about privacy, and they did not like the idea of letting agents learning about their borrowing, insurance, other expenses etc. that were not associated with property management. For this scheme to work, landlords would have to view letting agents in a similar way to accountants, and this was considered to be a major barrier to uptake.

It is worth noting that some landlords did like the idea of a letting agent being ‘accredited by HMRC’. Whilst this would not overcome all barriers, it did make letting agents seem more credible and trustworthy.

A further barrier was that landlords assumed that letting agents would charge for the service of withholding tax and paying it directly to HMRC. Landlords who only paid a letting agent a one-off fee to find a tenant, did not want to pay for a new service, and those who already used the full property management service did not want to be charged extra for tax administration. This was seen to be a less fundamental issue than their concerns around trust but was frustrating as landlords felt they would potentially be made to pay for a service that they did not want.

Finally, the current process of Self Assessment posed a barrier. Those who completed Self Assessment themselves did not see the need to pay someone else to do this. Those who used accountants for reasons other than declaring income from property (for example self-employment or having other incomes sources) saw no value in having a letting agent act in this capacity, as they felt that they would ultimately pay twice for tax administration, once to the letting agent for administering tax on income from property, and once to their accountant for administering all other tax.

Participants who only used accountants for declaring income from property were not interested in moving from a qualified tax expert to a perceived non-expert.

2.6 Audience insights: Letting agents

Two services were offered by all letting agencies and matched the services articulated by landlords. These were:

• finding a tenant - a one-off service involving advertising, credit checks, immigration checks, references, and a deposit protection service, for a flat-rate fee, usually around £350 + VAT

• A fully managed service whereby the agent manages the property, collects rent and is the main point of contact for tenants. The agent organises repairs and either deducts repair money from rent, which is then passed to the landlord, or sends a separate invoice for expenses. Smaller agencies reported charging 7 to 10% of the rent for this service, and larger agencies reported charging 10 to 15%

Letting agents were in agreement that a withholding service would need to be part of a fully managed service, and that landlords who paid a one-off fee to find a tenant would not be interested (landlords agreed).

A key differentiator impacting on attitudes was whether an agent worked in a branch of a large or national chain, or whether they worked in a smaller independent agency.

Those who worked in a larger agency tended to feel more supported by the business, and that their job was secure. They typically had a dedicated role as a letting agent (most did not also cover sales) and worked for an agency that charged landlords higher amounts than smaller agencies.

Other roles were covered by different departments, for example, most reported centralised dedicated service centres for administration and finance (such as credit checks, and immigration checks). Consequently, their focus tended to be on offering a premium service rather than keeping costs down, and on building relationships with landlords and tenants. They reported typically having clients who were service focused, and who would pay a premium for a hassle-free full service.

In contrast, those who worked for a smaller or independent agency articulated a more pressured working environment. Staff often reported having targets, such as a responsibility for finding landlords, and generally felt very busy in their day-to-day work lives. They were less likely to have dedicated departments and streamlined processes and often managed the lettings process end to end, as well as covering sales.

They tended to compete with larger agencies on price and had many local independent competitors, so felt very cost focused. They reported typically having clients who were also cost focused. These letting agents felt that there would be little appetite for a withholding concept from most of their clients as they would be forced to charge for such a service and were generally unenthusiastic about how much extra administration work would be involved.

2.7 Letting agents’ perception of the tax arena

Most letting agents were uninvolved in their client’s tax affairs. Some, particularly those working in national agencies, were conscious not to discuss tax with landlords as they did not wish to offer advice outside of their direct area of expertise. Rather than engaging with clients on any discussions around tax liability, they reported signposting them to the HMRC website instead.

The reasons given for this refusal to engage in tax discussions were concerns about liability, being blamed, and potentially sued if they gave inaccurate advice. Few letting agents reported any interactions with HMRC regarding their client’s tax affairs with regard to property rental. Consequently, letting agencies were generally unaccustomed to dealing with HMRC in this capacity.

Whether or not a landlord was declaring income from property and paying tax correctly was similarly seen by letting agents as outside of their remit, with many actively preferring not to engage with landlords on this topic. Some expressed disapproval of landlords who do not pay their due tax. Reporting of rental income to HMRC was seen as the responsibility of the landlord (except via the NRL Scheme).

Some, from smaller agencies, who suspected that a landlord may not be declaring income, said that they avoided the topic as they did not want to ‘scare off’ clients. Such letting agents reported that, in their competitive, cost-focused market, any suspicion that they may report landlords to HMRC could be likely to lose them business.

In summary, letting agents did not see themselves as the most natural fit for involvement in tax, in line with the views of landlords.

2.8 Letting agent responses to the new withholding concept

Letting agent opinions on the scheme were mixed, with those who worked for a large or national agency tending to be more positive, and those who worked for a small or independent agency tending to be more negative.

Those who were more positive could spontaneously see benefits of the scheme to their letting agency. These benefits centred on the idea of a new service that could differentiate an agency from its competitors, which was seen as interesting and potentially valuable. Some saw the idea as a new revenue stream while others saw it more as a way to add value and grow their client base.

Letting agents did not see the scheme as requiring them to become ‘tax experts’, in contrast to landlords who had perceived this to be a major barrier. Instead, they viewed themselves as tax administrators, who would not require expertise or accreditation beyond gaining HMRC approval, a step that would help them be seen as credible and professional. For agents in Wales (please note small sample of 4 interviews) the proposed service was perceived to be a good fit with the new ‘Rent Smart Wales’ scheme.

Most letting agents who were positive saw the new concept as a natural extension of the fully managed service they already offered. They already inputted most or all of the relevant details into their own system, for example the amount of rent, any money spent on repairs or other expenses, and therefore extending this to ‘sending the data to HMRC’ was not seen as burdensome, time-consuming, or requiring special training.

However, this assumed that any software provided by HMRC would need to be compatible with their own as having to input all data twice would be onerous. The concept would therefore not be a potential standalone product but part of a fully managed service (which they quickly acknowledged that not all landlords would want). They also assumed that the tax they were told to withhold from the rent by HMRC would be accurate and would not be challenged by landlords.

Some letting agents could envisage a subset of landlords being positive towards the concept. These included ‘small scale’ or accidental landlords, in particular those who were new to renting out property and also those who had property as an investment rather than for immediate profit. Letting agents envisaged being able to upsell the idea as an add-on to a fully managed service.

Letting agents further theorised that landlords who were less confident about tax and Self Assessment might see the withholding scheme as a good (better value) alternative to paying an accountant, and a hassle-free option that reduced the risk of making mistakes with HMRC. However, it is important to note that many landlords who fell into these categories did not view the withholding concept as something they would volunteer for.

Other letting agents, particularly those who worked in smaller or independent agencies, were negative towards the concept and spontaneously identified similar barriers to those articulated by landlords. Administration time and cost were seen as key barriers to those who did not have streamlined services and dedicated departments, and several realised that they would have to charge an extra fee for such a service, and that this would be unpopular with cost-focused landlords. Like landlords, some additionally raised concerns around liability. A particular concern was that the letting agent could find themselves paying a scheduled tax commitment on behalf of the landlord against no income received if a tenant defaulted on rent.

Letting agents also reported other potential barriers to the scheme. Those who worked in more deprived, lower-rent areas perceived that an explicit association with HMRC could have a negative impact on business if their clientele distrusted HMRC. Some letting agents were aware that landlords may mistrust them and thought that they would be unhappy with letting agent involvement in their tax affairs. Letting agents were also aware that landlords with larger portfolios may prefer to earn yearly interest on their income from property.

3. Conclusions

Overall, the idea of using a letting agent to collect tax monthly and pay direct to HMRC did not test well. Within the landlord sample, none of the landlords interviewed would have volunteered for the scheme as presented, and letting agents, including those who were positive to the idea, acknowledged that many landlords would not be interested.

Although there were positive elements to a monthly scheme, letting agent involvement was the key barrier as the administration of tax was often perceived to be outside of the remit of letting agents. They were not viewed as accredited, credible tax experts, so the idea of letting agents administering tax payments was not well received by landlords.

The idea of letting agents being privy to personal financial details, even simply the amount of tax a landlord paid every month, was therefore strongly rejected. Finally, it was assumed that a letting agent would charge for the service, which was also unpopular, particularly with cost-focused landlords who chose not to use a letting agency’s fully managed service.

The idea of the digital Personal Tax Account (as represented in this research) tested well and was seen as a good fit with the way many other financial affairs are being managed in the modern world. Although the idea of paying tax monthly or quarterly was not always liked, particularly by those who preferred to do Self Assessment once yearly, it was seen as understandable and in line with PAYE and other ‘pay as you go’ financial transactions.