Helen Adams provides suggestions on what to do if a client receives an HMRC letter about a low effective rate of tax
HMRC recently issued letters to approximately 1,000 taxpayers with income in excess of £150,000 whose effective tax rate is 22% or less. The letters were issued after the enquiry deadline expired for 2011/12 returns and suggest that the taxpayer’s return may be wrong, as their ‘effective rate of tax is lower than the average for people with a similar amount of income’.
There are many legitimate reasons why someone’s effective rate of tax for one year may be relatively low. They might have made a significant one-off gift aid claim, claimed relief for losses or made a large pension contribution. In addition, obvious errors such as omitted remuneration, benefits in kind and UK bank interest would usually be identified by HMRC’s checks and enquiries opened within the time limits. Consequently, the likelihood is that the return is either correct or has less obvious errors in it.
So what should be done?
A careful review of your client’s tax return is advisable. Make sure that all sources of income are present, including new bank accounts, etc. Also check that the conditions were met for all claims and elections (e.g. negligible value relief against income). Have a conversation with your client and ask them to carefully review the return to double check that it is complete and correct. If the return is correct then nothing needs to be done.
If there is a problem with the return then don’t delay, approach HMRC to correct it; failure to do so may lead to information notices and higher penalties if HMRC identifies the error within the time limit to issue discovery assessments. Depending upon what the error is and how much tax is underpaid, then it could be as simple as calling the helpline number on the HMRC letter, following the call with a letter and paying the liability (not forgetting to seek suspension of any careless error penalties, if appropriate). If significant tax is at stake or the issue affects more than one year, then using one of the disclosure facilities, such as the Liechtenstein disclosure facility, may be more appropriate.
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Effective rate? Effective letters?
Helen Adams provides suggestions on what to do if a client receives an HMRC letter about a low effective rate of tax
HMRC recently issued letters to approximately 1,000 taxpayers with income in excess of £150,000 whose effective tax rate is 22% or less. The letters were issued after the enquiry deadline expired for 2011/12 returns and suggest that the taxpayer’s return may be wrong, as their ‘effective rate of tax is lower than the average for people with a similar amount of income’.
There are many legitimate reasons why someone’s effective rate of tax for one year may be relatively low. They might have made a significant one-off gift aid claim, claimed relief for losses or made a large pension contribution. In addition, obvious errors such as omitted remuneration, benefits in kind and UK bank interest would usually be identified by HMRC’s checks and enquiries opened within the time limits. Consequently, the likelihood is that the return is either correct or has less obvious errors in it.
So what should be done?
A careful review of your client’s tax return is advisable. Make sure that all sources of income are present, including new bank accounts, etc. Also check that the conditions were met for all claims and elections (e.g. negligible value relief against income). Have a conversation with your client and ask them to carefully review the return to double check that it is complete and correct. If the return is correct then nothing needs to be done.
If there is a problem with the return then don’t delay, approach HMRC to correct it; failure to do so may lead to information notices and higher penalties if HMRC identifies the error within the time limit to issue discovery assessments. Depending upon what the error is and how much tax is underpaid, then it could be as simple as calling the helpline number on the HMRC letter, following the call with a letter and paying the liability (not forgetting to seek suspension of any careless error penalties, if appropriate). If significant tax is at stake or the issue affects more than one year, then using one of the disclosure facilities, such as the Liechtenstein disclosure facility, may be more appropriate.
