Though the onus is ultimately on the taxpayer to complete an accurate tax return, the author of this article says we can’t ignore the fact that many individuals do not have all the information they require, but the industry as a whole does. 

The following article looks at an important component of tax compliance – filing and sharing information. Much of the grind of paying taxes is not just at this level – although that’s plainly a big part of the requirement – but the time it takes to complete forms and submit information on time. This is all part of the “deadweight” cost that taxes impose. Naturally, this is an ever-present consideration for the clients of those in wealth management and private banking. 

To discuss all these matters is Michael Edwards, managing director of Financial Software Ltd. The editors are pleased to share these views; the usual editorial disclaimers apply. To respond and enter the conversation, email tom.burroughes@wealthbriefing.com

HM Revenue & Customs continues to tighten up its pursuit of taxpayers, increasing fines and issuing higher penalties for reporting errors, non-disclosures, and the late filing of tax returns. In April, Chancellor Rachel Reeves announced that Labour would invest £555 million ($743.7 million) into HMRC investigations in a bid to raise an extra £700 million in tax in its first year and £5.1 billion per annum by the end of the next parliament, suggesting that HMRC’s crackdown will only get tougher.

Though the onus is ultimately on the taxpayer to complete an accurate tax return, we can’t ignore the fact that many individuals do not have all the information they require, whilst across the industry we do. 

The way the system is set up, investors face severe consequences for mistakes and omissions while financial institutions have far less inducement to share details that could affect someone’s tax position. By not arming individuals with enough information about the products they offer and the impact on their tax liability, finance professionals can be seen as falling short of their responsibilities under the new Consumer Duty rules and failing to serve their target market effectively. 

We believe that Consumer Duty means full transparency, which is why we want to encourage information sharing to increase investor understanding.

I was discussing this point recently with one of our tax experts, Alex Ranahan, who highlighted several examples of complex frameworks and fractured information putting taxpayers at risk, compared with very few consequences for service providers:

-- In April, HMRC’s Permanent Secretary Jim Harra told the Treasury Select Committee that promoters of tax avoidance schemes would not receive a penalty, only taxpayers who join the scheme. Similarly, with the loan charge scheme, which has been linked to several investor suicides, there were no repercussions for the firms that promoted the schemes as tax compliant originally. Since then, a cross-party working group has been established in parliament to address the loan charge issue.

-- HMRC is clamping down on non-compliance and inaccurate reporting of offshore investment that could be subject to excess reportable income (ERI). These tax return errors can cost investors up to 200 per cent of the tax due. In contrast, the maximum penalty for an offshore reporting fund that makes a serious breach is that it leaves the reporting fund regime immediately and fund managers face no direct penalty for failing to comply. More individuals are investing in offshore funds and non-disclosure can often simply be because taxpayers don’t even realise that they have something to disclose. Worryingly, the new Reserved Investor Fund (RIF), legislated under the Spring 2024 Finance Bill, is set to follow the ERI regime model – despite its notorious complexity and major reporting challenges due to patchy data.

-- The high-income child benefit charge (HICBC) is another area where many individuals fall short of their obligations because they are not aware of the rules. As a result, they may have to pay tax, plus interest, plus penalties several years after their child benefit claim. We are now seeing several appeals and tribunal cases against HMRC. Some receivers of child benefit are seeing favourable outcomes, but most cases have sided with HMRC.

-- From 1 February 2023, HMRC ceased to review options to tax VAT on a commercial property. The burden now falls squarely on the taxpayer to determine whether it is a valid option to tax and to keep accurate records. HMRC is also refusing to issue a “certificate of an option to tax.” This has resulted in some taxpayers coming up with inventive ways to elicit a response from HMRC, including sending their details to a generic email address to generate an auto-response receipt.

These are just a few instances where HMRC and FIs aren’t providing taxpayers with pertinent information. As a result, a taxpayer who fails to opt to tax within 30 days or who can't present proof of option to tax is charged, while someone who has the misfortune to invest into an offshore reporting fund run by a manager who repeatedly breaches the requirements of the regime is charged a higher rate of tax than they had initially thought when they made the investment.

Data-sharing arrangements have increased the amount of information HMRC receives, but in many cases, it is not being passed on and more details are still being requested directly from the taxpayer. Reporting funds know their reporting income and which institutions and individuals have invested in them. FIs know which clients have units, and HMRC knows which individuals have accounts with which institution. In this case, it’s reasonable to argue that the taxpayer is in the least knowledgeable position to complete their return. 

HMRC has instigated letter campaigns, which had some success to begin with, but recent data suggests that their impact is now waning. If we want tax compliance to improve, we need to examine whether the system is incentivising and indeed penalising the wrong party.