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HMRC asks taxpayers to check their effective tax rates

by Tax Faculty Team on 03.06.2014 12:28

Latest HMRC ‘nudge letters’ aimed at high net worth individuals 

As readers may be aware from the media, HMRC has been writing to selected taxpayers to tell them their effective rate of tax is lower than average and ask them to check if it’s right. Copies of the letters have been sent to authorised agents. 

The letters, headed up ‘Your effective rate of tax’, have, we understand, been sent to around 1,000 high net worth individuals. The letter says: 

“A person’s effective rate of tax is the percentage of their income they have paid in tax. 

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.” 

Recipients are then asked to check their returns for 2011/12 and contact HMRC if something is wrong. Penalties are mentioned and the letter ends up sententiously, “Paying the right amount of tax is important, as it helps to pay for the public services that we all rely on. Not paying the right amount of tax has serious consequences for these services.” 

HMRC says that unless it hears from the taxpayer within one month it will assume they have checked their return and found nothing wrong. 

We have a number of concerns about these letters: 

  • There are plenty of reasons why the effective rate of tax may legitimately be low for a particular taxpayer for a particular year – eg reliefs have been claimed for losses, EIS investments, gift aid payments or pension contributions. The letter says nothing of this, and it would appear HMRC has not checked for such items on the tax return before writing to the taxpayer.
  • Most taxpayers will not really 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.
  • If the taxpayer is represented, the taxpayer is likely to turn first to the agent with the question, Did you get my tax return wrong then? HMRC has regularly said how essential agents are to the tax system – but this sort of letter is hardly helping us in that role.
  • The letters are about tax year 2011/12, for which (for the vast majority of taxpayers) the enquiry window is now closed. HMRC could open that year if the discovery provisions applied, but they do not – HMRC apparently has no concrete information, just a risk assessment. 

The text of the letters was not shown to professional bodies beforehand. This is one of a number of letters which HMRC has been using to ‘nudge’ potentially non-compliant taxpayers to sort things out. 

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.  

In legal terms there is no obligation to reply to HMRC. In practice you might consider writing to HMRC to explain the effective tax rate or draw attention to notes which you may have already made in the tax return ‘white space’. 

In the meantime, we’d like to hear from any members whose clients have received such letters. Post a comment below or email jane.moore@icaew.com