As a seemingly bottomless pit of money continues to be distributed to those individuals and businesses most severely affected by Coronavirus, it was predictable that HMRC would try and seek to collect more tax through non-compliance. Understandably the Exchequer want to recoup as much of the unprecedented and unexpected costs incurred in recent months as possible.
We have seen a series of ‘nudge letter’ campaigns in recent history with doctors, landlords and those with overseas income producing assets arguably being hit the hardest. Indeed, the Requirement to Correct (RTC) campaign with its gargantuan penalties has been extremely successful in flushing out both UK and non-UK domiciled taxpayers who perhaps forgot to tell HMRC about their overseas holiday letting income or reporting fund shares for example. The problem with the RTC was that taxpayers ended up paying disproportionately large penalties on overseas income and gains in comparison with those with domestic based sources. It also dragged those who had made an honest error into the frame for the draconian penalties unless a reasonable excuse subsisted.
The latest trend at HMRC seems to be the issue of the ‘One to Many’ letters where HMRC identify a particular area of non-compliance, which they believe will prompt taxpayers to come clean on undeclared income and gains. The internal guidance is within HMRCs ‘Compliance Handbook’ at CH600000 onwards with a huge amount of guidance. Within the manual they describe the purpose behind the letters as ‘highlighting specific errors we often see customers make and direct customers to guidance to help them correct those’.
As a firm that looks after a significant number of wealthy non-domiciled clients, copies of letters setting out the impact of deemed domicile status and the protected status for foreign Trusts have been forwarded to us. These letters are being labelled ‘educational’ but the tone feels more akin to an Enquiry letter with ‘What to do now’ instructions suggesting an agent review of particular aspects of the Returns. It doesn’t seem so long ago that Tax Advisers were scrambling to get letters together for their clients warning them about the Common Reporting Standard and the importance of making sure that all foreign income and gains have been correctly declared.
This latest round of letters from HMRC seems to service two purposes. Firstly, to try and prompt any stragglers who, for whatever reason, are yet to disclose. Secondly, and call me cynical, to pave the way for higher penalties because the taxpayer can now be said to have been prompted. Of course, as HMRC currently have scant resource to draw upon due to Brexit and now Coronavirus, the opportunity to rake in higher penalties on the back of a mass issue of letters is an easy win. Not only are overseas ‘risk’ areas covered but also a plethora of other potential mistakes typically made in Returns such as the omission of gains on second properties, deferred consideration and the old favourite- bank interest.
There are no background checks made before the letters are sent, so it is quite likely that the overwhelming majority of recipients will have nothing to do. Indeed, my partner is German and has an account in Germany containing around 10 Euros. She was alarmed when she received a letter from HMRC suggesting that she owed tax. I soon set her straight and the letter was put through the shredder! That amount of paper and postage cannot be cheap!
The ‘One to Many’ guidance discussed how to analyse the effectiveness of the letters issued through engaging with their ‘Knowledge, Analysis and Intelligence’ people. It would be good to get a Freedom of Information request in afterwards for us Tax Advisers to see if the fruits of their labours were worthwhile the cost of aggravating already compliant taxpayers and agents.
Of course, there will be a few recipients that do need advice, particularly with complex overseas matters. Our experienced team of Tax Advisers can provide that assistance to bring your affairs up to date.