Nice to see you are making some progress - keep plugging away
The house is technically mine. From 2009 - 2012 my Sister was lodging at the house and she was paying me £400 a month and was also paying me for the council tax which was 148 a month. So she was paying me 548 most months. I was counting all of this as rental income. I hope that was correct. I was claiming 4250 off this income anyway for the rent-a-room scheme.
July 2012 Sister moved out and I took on 2 lodgers I set up a DD to pay my sister 400 a month. The lodgers together bringing 950 a month. We all went thirds on the council tax so about 1050 going to the account, I appears I included the 400 SOME of the time (really not sure why it was inconsistent), and got 4250 off the taxable amount. This went on until April 2014 when the lodgers left. The house was empty in May/Jun/Jul 2014 and was being renovated including carpets, all interior paintwork etc.
From Aug 2014 I moved in with my parents and rented my entire house out for 1175/m and didn't claim any expenses other than the renovation/insurance/annual gas safety checks. My payments of 400 /m to my Sister carried on until August 2015. U was obligated to pay this as our Dad had helped finance the house and wanted us to both benefit from it. I did not declare the full 1175 rental income, only the net minus the 400 as it wasn't mine.
HMRC have only looked at one year.. Apr 2014- Apr 2015 and are trying to apply extra 400 a month right back to 2009/2010 despite this not starting until 2012. I can hopefully put them straight on that part of their 'query' once i present them with the figures that I have actually worked out.
With regard to prior extrapolation by hmrc after they have proved an issue with the year of enquiry - if you provide them of reasonable evidence that things were different in prior years they should revise their calcs as appropriate - they shouldnt seek to tax other years if it is obvious tax isnt due - it is always in your upmost interests to always show that any errors are very one of in nature if that is likely to be the case.
Reference deduction for money paid to your sister this sound confusing - is the house wholly in your name only? - with no specific arrangement otherwise? if it is hmrc may take more convincing you only received half the income, i would not expect though that they would look to tax the same income twice - by providing evidence that you sister has paid tax on this income or at least declared the income to hmrc this may help the situation. If its all in your name though and you simply informally gift your sister money each month that she does not treat as taxable income then it is likely that you may be struggling to convince hmrc that the whole income isnt taxable.
As warmstax advises if you run into a brickwall on any aspects that would be the time to appoint a suitable expert to see if there is any other ways to make hmrc see sense.