Professional experts are warning that in legal terms, high net worth individuals who have received HMRC's letters have no obligation to respond to them
According to the ICAEW, HMRC has sent a letter headed ‘Your effective rate of tax’ to around 1,000 high net worth individuals, suggesting their returns indicate their effective rate of tax is below the average. Copies have been sent to authorised agents.
There are plenty of reasons why the effective rate of tax may legitimately be low for a particular taxpayer for a particular year. The letter makes no mention of the possible use of reliefs which have been claimed for losses, EIS (Enterprise Investment Scheme) investments, gift aid payments or pension contributions, any of which could affect the amount of tax paid.
The fact that the letters do not mention the above possibilities seems to indicate that ‘HMRC has not checked for such items on the tax return before writing to the taxpayer'. The letters may also unnecessarily prompt represented taxpayers to question their agent’s preparation of their tax returns.
It is also worth noting, as highlighted by the ICEAW, that the letters are about tax year 2011-12, for which, for the vast majority of taxpayers, the enquiry window is now closed and HMRC can only re-open that year if discovery provisions applied , ie, HMRC must have concrete information, which they do not.
The ICEAW says that ‘in legal terms there is no obligation to reply to HMRC’.
The letter states: ‘Looking at the figures in your self assessment tax calculation for the year ended 5 April 2012, we can see your effective rate of tax is lower than the average for people with a similar amount of income to you. This means there could be something wrong with your self assessment tax return.’
The text goes on to ask recipients to check their returns for 2011/12 and contact HMRC if something is incorrect. HMRC says that unless it hears from the taxpayer within one month it will assume they have checked their return and found nothing wrong. The letter also mentions possible penalties for non compliance.
ICAEW says it has a number of concerns about these letters, including the fact that many taxpayers will not readily understand what is meant by the effective rate and may be worried unnecessarily. The letter gives no specific information about what might be wrong, so an unrepresented taxpayer will not know where to start checking. in cases where recipients of the letter are presented, ICAEW says the natural response will be to query the agent’s handling of their tax return, which it says risks undermining the agent’s role in the tax system.
In its comment on the issue, ICAEW says: ‘The Tax Faculty, with other professional bodies, will be taking this up with HMRC. We have no problem with HMRC using new tactics to tackle the non-compliant, but are not happy with this imprecise and unhelpful letter.’
More details are available at http://www.ion.icaew.com/TaxFaculty/post/HMRC-asks-taxpayers-to-check-their-effective-tax-rates