Contractors seeking a mortgage should exercise extreme caution henceforward thanks to a new scheme of ‘income checks’ with HMRC.
The scheme is the brainchild of a joint initiative by HMRC, the Building Societies Association and the Council of Mortgage Lenders. Launched last year, it is aimed at combating mortgage fraud and is rapidly gaining momentum. In a nutshell, it permits lenders to verify the income declared by borrowers by contacting HMRC to check that it matches tax returns.
Contractors have often innocently declared gross contract rates when approaching lenders or mortgage advisers. This is where some very nasty problems could now arise: if you adopt this approach instead of, say, submitting payslips from your PAYE umbrella service or providing company accounts, the annualised figure, if passed on to HMRC, will almost certainly fail to match that recorded in the tax return. Expect a visit from the taxman and a stressful investigation as a result.
Independent Financial Adviser Tony Harris suggests that anyone working through umbrella companies or limited companies should refrain from approaching a high street branch and instead find lenders “who specifically welcome contract based income underwriting.” He said:
“You need to ensure that your application lands on the desk of a key decision maker at the lender’s HQ who already appreciates your employability as a freelancer and is happy to therefore base affordability on the contract alone.”
There are contractor mortgage specialists available who will not charge broker fees for the advice they give, he continued. However, he added: “[I]t is very important that you don’t get this wrong because with HMRC now involved the repercussions could be very serious indeed.”