Tax Aware: How to deal effectively with HMRC

• In recent years we have seen a number of measures from HMRC to encourage greater transparency of UK residents' onshore and offshore financial arrangements. This trend is a global one and new information exchange agreements and mandates are coming into effect, increasing Governments' data gathering capabilities and the ability to analyse it with recourse years later. 
• HMRC therefore has a huge amount of information available to them, which enables it to check data given (or not given) to them by taxpayers, with particular attention paid to those who are identified as having a higher risk of non-compliance.
• HMRC's approach to tackling non-compliance ranges from 'nudge letters' to formal enquiries, with the aim of checking that a taxpayer has paid the right amount of tax and, if not, to collect the shortfall and penalise non-compliance.

Practicalities

• HMRC generally hopes to increase its efficiency in enquiry work by targeting taxpayers who represent the biggest risk of non-compliance.  Taxpayers who always file their tax returns and pay their tax liabilities on time are normally less of a ‘risk’ than those who do not.  When completing tax returns, taxpayers (and their agents) should make best use of the ‘white space’, to fully explain any unusual or ‘one-off’ entries.
• Accept the seriousness of the enquiry even if there is nothing to hide and no risk that you have under-reported.
• Large-scale enquiries can be comprehensive, and typically take at least 12 months to resolve.  It can therefore be tempting to ignore correspondence from HMRC, or at least leave it until the last minute to reply.  However, this can be counter-productive, as the HMRC officer may assume that delays are indicative of underlying problems, leading to incorrect assumptions about the accuracy of the return. 
• On receipt of an enquiry, taxpayers should review files and returns, take advice, and try to maintain a co-operative approach with HMRC.  If you find something inaccurate, the earlier into the enquiry you make disclosure, the better.

• You can apply to HMRC for non-statutory clearance or approval of certain tax matters. However, the service is there to provide clarity on the application of legislation or HMRC guidance to a specific transaction. The service is not there to answer questions of fact. 
• HMRC usually aims to respond within 28 days (12 weeks for VAT clearances), but this time limit is not set in stone, so it is advisable to apply early to give yourself as much time as possible.

Practicalities

• Keep your application concise, set out the analysis and uncertainty as clearly as possible and limit the clearance to one question – do not ask HMRC to comment on an 'either-or' analysis.
• If you have a contact at HMRC, discuss the viability of the clearance with them first if possible, and/or copy them into correspondence.
• Always offer to provide further information that may be required for HMRC to provide a response to the application.
• Be cautious that the clearance will relate to the specific fact pattern you have disclosed. If there are changes to the facts going forwards it may be necessary to submit a supplemental application following the initial response from HMRC.

• The Spring Budget emphasised a push to provide more resources to HMRC to tackle tax evasion, and a toughening of certain penalties, such as doubling the maximum sentence for tax fraud.
• Further rules have been introduced that deal with enablers and promotors of tax avoidance.
• HMRC deals with cases of tax evasion, avoidance and fraud very seriously and can use criminal sanctions.

Practicalities

• Disclosure Facilities can be used as a civil mechanism to resolve tax errors. The Contractual Disclosure Facility is especially valuable in the right circumstances, wherein the individual suspected of tax fraud enters a contract with HMRC for full disclosure, in return for which HMRC agrees to not instigate criminal proceedings.
• Voluntary disclosures can also be used to potentially lessen the penalties faced by an individual but should be used carefully.
• There is limited opportunity for negotiation, particularly in regard to settlements. However, there may be some scope to discuss limited aspects of the matter around procedure, interest and penalties.
• In the event you disagree with HMRC's conclusion, there is the opportunity to appeal to the tax tribunal.   

• Major tax reform is unlikely before the next election. Beyond the election, while further reform of ‘minor’ taxes is possible, any serious fiscal tightening will necessarily involve the 'big' taxes - income tax, NICs and VAT.
• In any pre-election period, announcements on future tax reform should be viewed with considerable caution. Businesses should plan on the basis of the law as it stands and should not rely on, nor worry excessively about, promises of future change. 
• Although changes to the "non-dom" regime, capital gains tax and inheritance tax are possible (or even likely) post-election, the technical and political complexities of reform in these areas mean that any reforms may well take a number of years.

• In the last year the two tax charities, TaxAid and Tax Help for Older People, have provided support to some 12,000 individuals in financial, physical or mental hardship who have been overwhelmed by problems with tax or HMRC.
• More on the work of the tax charities can be found here.