DOMINIC COYLEanswers your questions

Q Am I in tax trouble with my London rental?

I bought a flat in London in late 2006. Since then I have filled out a tax form for the Irish Revenue Commissioners each year, declaring my rental income, expenses incurred and my mortgage repayments.

I am sure I was advised that, because of the tax agreement between the UK and Ireland, I did not have to complete a UK Inland Revenue tax return but simply needed to complete the Irish Revenue tax return and they in turn would contact me with regard to tax due.

As far as I was aware the tax I was paying since then through my employer was being weighted against this rental income. But my letting agent in London contacted me recently because of an audit being carried out by the Inland Revenue. They seem to think I should have been filling out UK tax returns and paying tax directly there.

Now I am really worried as I fear I may not have complied with the tax rules as I misunderstood them. Not only might I owe Inland Revenue money but also penalties. Please enlighten me in layman’s language!

– Ms AH, e-mail

A

I think you have a problem here. The general rule on property income is that it is taxed in the country where it arises. Certainly in the UK, landlords are expected to return rental income for tax.

In the case of non-resident landlords, the letting agent dealing with your property is supposed to deduct the basic rate of income tax – 20 per cent – from rent collected and return it to the Inland Revenue on a quarterly basis under the Non-Resident Landlords Scheme. They must also file an annual return. The tax they return to the Inland Revenue is net of any allowable deductions.

If you have no letting agent and if the rent is above £100 a week, your tenant is supposed to withhold the basic rate of tax and again, return it to the Inland Revenue quarterly.

In either case, the person withholding the basic tax is supposed to send you a tax deduction certificate (Form NRL6), outlining the rent withheld. Full information is available at url.ie/75t3.

There are certain exceptions but only if you have successfully applied to the UK Inland Revenue for self-assessment status or if you have no liability to tax because of personal allowances. On the other hand, if your rental income is sufficiently high, you might find yourself having to pay some additional tax at the higher rate.

In either case, it sounds to me that the letting agent – whom you are paying – has been remiss in advising you on your obligations. This is a serious matter.

You are right that there is a tax agreement between Ireland and Britain. This, among other things, effectively ensures that you do not pay tax again on the same rental income on which tax has been paid in the UK. It does not allow you ignore your liability to the UK tax authorities.

In any case, even in Ireland, tax on rental income is not taken through the PAYE system but returned separately by the landlord annually.

You are now in a sticky situation and certainly face interest and, possibly, penalties from the UK Inland Revenue. I suggest you contact a tax adviser/accountant immediately. Thereafter, you will need to talk to the UK tax people, ideally providing details/photocopies of communications between yourself, the Irish Revenue Commissioners and/or the letting agent.

This column is a reader service and is not intended to replace professional advice. No personal correspondence will be entered into.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, 24-28 Tara Street, Dublin 2.

E-mail: dcoyle@irishtimes.com