Unfiled Tax Returns: Risks & Solutions Explained

A client walks into the office and admits they haven’t filed a self-assessment tax return for 10 years—despite earning over £150,000 per year from property rentals. Their employment income has been taxed via PAYE, but their rental income has gone undeclared. Now, they’re worried about what happens next and how to avoid the worst consequences from HMRC.

What Are the Immediate Risks?

Failing to file tax returns while earning significant untaxed income creates serious risks, including:

1. HMRC Discovery Assessments & Tax Investigations
   • HMRC has the right to go back at least 20 years if it believes there was deliberate tax evasion.
   • Penalties can be up to 100% of unpaid tax, plus interest.
   • A full-scale investigation could result in criminal prosecution if fraud is suspected.
2. Severe Late Filing & Payment Penalties

1. £100 fine for each late return.
2. Daily £10 penalties (after 3 months, up to £900 per year).
3. 5% of unpaid tax after 30 days, 6 months, and 12 months.
4. Interest charges on overdue tax.
5. Loss of HMRC Leniency

1. If HMRC contacts the client first, there’s less chance of reducing penalties.
2. If the client comes forward voluntarily, they may get lower fines and more time to pay.

The Best Course of Action: A Voluntary Disclosure

The best approach is to get ahead of HMRC by making a voluntary disclosure through the Let Property Campaign (LPC) or the Worldwide Disclosure Facility (if offshore income is involved).

Step-by-Step Plan to Resolve the Issue

1. Gather All Financial Records
   • Rental income and expenses for the last 10 years.
   • Mortgage interest statements (to claim allowable deductions).
   • Property management fees, repairs, and other deductible costs.
   • Bank statements to verify rental payments received.
2. Calculate the Tax Owed

1. Work out taxable rental profits for each year.
2. Apply correct tax bands for each tax year.
3. Factor in allowable expenses to reduce the liability.
4. Make a Voluntary Disclosure via the Let Property Campaign

1. This is the best option for UK-based landlords who haven’t reported rental income.
2. Offers a structured way to report unpaid tax with reduced penalties.
3. HMRC is more lenient if disclosure is made before they initiate an investigation.
4. Negotiate a Payment Plan (If Needed)

1. If the total tax liability is too high to pay immediately, we can apply for Time to Pay (TTP) arrangements.
2. HMRC typically allows instalment payments over 6-12 months, or longer in hardship cases.
3. Implement a System to Stay Compliant

1. Moving forward, quarterly tax reporting will be mandatory under Making Tax Digital (MTD) for landlords from 2026.
2. Set up cloud-based accounting for future compliance.
3. Ensure tax planning strategies are in place to minimise liabilities legally.

Final Thoughts: Act Before HMRC Does

Ignoring the issue only makes it worse. If HMRC discovers undeclared income first, the client faces higher penalties and more scrutiny. By coming forward voluntarily, they can reduce fines, avoid prosecution, and regain financial peace of mind.

If you or someone you know has undeclared rental income, now is the time to act. Let’s resolve this before HMRC comes knocking.