A Treasury crackdown on the cash economy could ensnare buy-to-let landlords who carry out extensive repairs to their properties. Tax experts have said that buy-to-let investors who develop property could be caught by the rules of the Government’s Construction Industry Scheme (CIS), which was revised this year.

Landlords may be obliged to file monthly tax returns recording payments to builders and other subcontractors, with fines of up to £5,000 for those who are found to be unregistered.

Alan Nolan, director of tax and people services for KPMG, the accountancy firm, said that someone buying a rundown property to develop would be regarded as having a business including construction operations and so be within the CIS.

Failing to register for the scheme could incur a penalty of about £5,000, and any unregistered subcontractors could be forced to forfeit 30 per cent of their income from the particular project. The taxman can pursue this debt from the landlord. Failure to file a monthly tax return carries a £3,000 fine.

HM Revenue & Customs is working to clarify the rules under the scheme, with further guidance expected in the summer.

An HMRC spokeswoman said that the CIS was not intended to include buy-to-let investors. She confirmed that a review of the legislation would be undertaken this year.

Mr Nolan said: “The Revenue are being very strict at the moment. The message that comes out here is clear: make sure you clarify the position with the Revenue before you start developing property to avoid a hidden liability that could run into thousands of pounds.”

Mr Nolan said that that those whose average expenditure on property development exceeded £1 million did not have to register for the scheme.

The CIS, which is meant to target freelance contractors on construction sites, was relaunched earlier this year. The rules were tightened so that contractors must be “verified” and must now file monthly, rather than annual, tax returns.

The buy-to-let market has boomed in the past decade and more than 330,000 buy-to-let mortgages worth £38.4 billion were taken out in 2006, a ninth of all new lending last year, according to figures from the Council of Mortgage Lenders. However, rising interest rates have prompted forecasts that the buy-to-let market will cool, and that landlords will instead begin preparing their properties for sale.

Copyright © 2007 First Mortgage Trust