Contractors warned over HMRC mortgage verification scheme

A new scheme, originally launched in September 2011, but now increasingly being used by lenders, could cause fresh problems for contractors who are applying for a mortgage or remortgage.

HMRC to work with lenders to clamp down on false income declarations

Implemented by the Council of Mortgage Lenders in partnership with the Building Societies Association and HMRC, its aim is to combat mortgage fraud and allows lenders to contact the taxman to verify income declared on the mortgage application with the borrower’s tax returns.

To put it simply – if the figures don’t match, then the applicant could face investigation.

On the face of it, this could cause very real problems for freelancers who may innocently use their gross contract rate after approaching a lender directly or dealing with a mortgage adviser who may lack specialist knowledge of working with contractors.

The annualised gross contract rate will almost certainly not match the income figure shown on a tax return and so it is imperative that borrowers exercise caution when deciding how to apply for a mortgage.

Significant increase in cases since inception

According to the Independent, the scheme has been increasingly used by lenders since its inception:

In its first year, the scheme considered just 386 cases referred to it by lenders. Within five years – in 2017 – it was looking at almost 11,000 every year

Interestingly, according to fraud prevention agency CIFAS, cases of mortgage fraud increased 5% between 2018 and 2019, with almost half of fraudulent cases being carried out by 31-40 year olds.

Scheme highlights importance of using a specialist mortgage broker

Tony Harris, who runs specialist IFA, Contractor Financials, commented:

“The key to avoiding any problems with this initiative is to ensure you approach the correct lender in the first place. If you intend to use the gross contract, as opposed to the traditional company accounts or umbrella company payslips route, it is vital that any application is made to those lenders who specifically welcome contract-based income underwriting.

“You needn’t pay any more in terms of interest rate by approaching the correct lender and there are still contractor mortgage specialists who charge none of the usual broker fees for their advice but it is very important that you don’t get this wrong because with HMRC now involved the repercussions could be very serious indeed.”

He added, “As an example, we help contractors from the first day of your very first contract but we would need to be very selective as to which lender we use and we would never approach a high street branch with your application. You need to ensure that your application lands on the desk of a key decision-maker at the lenders HQ who already appreciates your employability as a freelancer and is happy to therefore base affordability on the contract alone.”

On the plus side, this initiative could help wipe out mortgage fraud by those exaggerating incomes and providing fake payslips, etc. which in turn could lead to a safer lending environment and ultimately boost the lenders’ confidence in the housing market overall.

However, in order to avoid falling victim to the consequences of this initiative, it appears more important than ever that contractors talk to a specialist.

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    Please use this article as a guide only. Always seek professional advice when considering your mortgage options.

    Partner Contractor Accountants

    Last updated: 15th January 2022