Given the nature of our high-profile clients, higher (than average) income levels and multiple business interests mean that their tax affairs attract an extra layer of scrutiny from HMRC.
This can be expected as, from HMRC’s perspective, there is an enhanced need to ensure the correct level of tax is being paid or there is potentially more tax at stake, depending on how you look at it.
Accordingly, we have had (and no doubt will continue to have) numerous interactions with HMRC and this article provides examples and looks at ways in which HMRC can enquire into a return, via formal or informal means.
Powers to amend
The powers to amend and correct returns and to open a compliance check lies within TMA 1970 and is as follows:
It should be noted that HMRC has powers to issue information notices outside of the above.
S.9zB – Obvious error or omission
HMRC has the power to amend an arithmetical error or an error of principle.
These powers give taxpayers and HMRC a chance to efficiently update the tax return.
Correcting an error of principle is fine (in principle) however the basis upon which this is determined should be logical.
We have found that HMRC have used this section of tax legislation to point out errors which are not obvious (in our opinion) and perhaps the grey area is due to the fact it is difficult (and unwise) to define what an obvious error is.
Why would HMRC use this part of the legislation?
One possible explanation is that they do not wish to open a formal enquiry (under s.9A) as upon conclusion of this, they are not able to issue a separate enquiry, thereby unilaterally withdrawing the closure notice. As you can appreciate, this hampers their approach in the future if they need to investigate further, diminishing their investigative powers.
Furthermore, corrections issued in s.9zB does not preclude HMRC from commencement of formal enquiry under s. 9zA.
Tax legislation does not distinguish between different types of enquiry and so the nature and extent of enquiries will vary considerably.
Aspect enquiries will question specific items, however, there is scope to extend this into a full enquiry if an HMRC Inspector feels there is good reason to do this.
Interaction between Class 1, 2 and Class 4 National Insurance Contributions (NIC)
One example where HMRC uses the obvious error legislation is to correct the National Insurance position.
NIC basics
Class 1 NIC is paid by employees and Class 2 & 4 NIC is paid by self-employed individuals, but it is possible to be liable to both!
Take, say, an Academy footballer; he will be an employee of his club and self-employed in respect of his boots deal endorsement earnings. The player will be paying sufficient Class 1 NIC given the level of his salary and there is a limit to the amount of NIC that a taxpayer is liable to.
Overpaying NIC
The immediate issue here is the scope to be overpaying NIC – why should the player be charged more NIC than, say, his teammates who do not have third party endorsement earnings when a limit is in place?
Accordingly, there is a restriction calculation of NIC to ensure that taxpayers are not overpaying if they fall within the above example. This is known as the annual maxima and provided sufficient Class 1 NIC has been paid via employment income, the amount of Class 2 & 4 NIC will be severely restricted.
We have had several instances where HMRC have insisted on a NIC shortfall, on the basis Class 2 & 4 NIC should not be restricted. This misses a glaring and obvious fact that Class 1 NIC has been (sufficiently) paid.
Part of it could be down to the fact that for NIC purposes, self-employed individuals are dealt with by a different department than employees and there is a historical reason why this is the case. However, this seems to be an example of the left hand not knowing what the right hand is doing and not the first time HMRC departments do not communicate with one another!
Devolution & Place of Residence – Scottish taxpayer
We have seen several revised tax calculations issued by HMRC which use the Scottish rates of income tax as opposed to the English rates. This predominately affects Scottish footballers who move to play in the English Divisions.
The Scotland Acts of 2012 and 2016 extended the devolved powers to local government to vary income tax rates and thresholds.
Only Scotland has varied the tax rates which were previously in existence. As such, the question of whether a taxpayer is English (or Welsh or Northern Irish) or a Scottish tax resident is a pertinent one.
How do you determine whether a taxpayer is English or Scottish?
A ‘close connection’ with Scotland will make you a Scottish taxpayer and if a close connection cannot be established, days spent in each part of the UK (counted separately) will determine residence.
A close connection can be a single place of residence in Scotland or if you have more than one place of residence in the UK, then you will have spent more days in the Scotland residence than any other part of the UK.
Taxpayers are being contacted shortly after the submission of their tax returns informing them that the £1,300 tax repayment they were hoping for is now actually a £250 tax bill to be paid to His Majesty’s Revenue & Customs.
How did it ever get this bad?
We have discovered through our communications with HMRC that they are using the taxpayer’s correspondence address as a basis to determine their residence position. This is not indicative of where the individual actually lives and calls home.
Summary
Whilst HMRC’s nudge letters can be useful, we believe the procedure in which they adopt a certain scenario needs to be reviewed.
Not only do the corrections cause confusion, the inevitable delays in dealing with HMRC via (second class) post will mean that they hold onto, say, a potential tax overpayment for a few months longer. It produces a result that is contrary to what the legislation meant it (no doubt) to be intended for.
It is important to remember that there is no obligation to accept HMRC’s position and notices should be challenged when appropriate.
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