Tax
A Nudge In The Wrong Direction From The UK's Tax Collector?
The authors look at how HM Revenue & Customs sifts through information to chase people who it thinks owe taxes. They find a number of problems, and explain that educating and informing taxpayers is a sensible way forward.
The UK tax authority has, it seems, a growing array of weapons that it can use to collect revenues. One of the latest instruments is called the disarmingly gentle-sounding “Nudge Letter.” To explain how they work and their significance are Harriet Ballard, solicitor and Matthew Braithwaite, partner at Wedlake Bell. The editors at this news service are pleased to share these views; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com
There is a wide range of tools in the ever-burgeoning kit bag of
HM Revenue & Customs ("HMRC") for it to brandish in pursuit of
the tax it believes it is owed. The most recent of which, is the
'Nudge Letter', the practice of issuing a batch of letters to
taxpayers who it suspects may be failing to pay the correct
amount of UK tax.
HMRC is able to do this through its data matching tool "Connect,"
cross matching its own data and third-party data (i.e. data
gathered under the Common Reporting Standard ("CRS") from other
jurisdictions) to ascertain anomalies arising from relationships
and patterns between individuals, organisations, and information.
However, its ability to distinguish from the more harmless
anomalies and those which are more disquieting are not
adroit.
One of the issues is that the data gathered through the CRS is
prepared on a calendar year basis, unlike HMRC's tax-year
calendar; so HMRC cannot easily unify the information received
with the taxpayer's return. Consequently, HMRC's interventions,
like the Nudge Letter, are often inaptly targeted; ensuing in a
steady stream of "Nudges" landing on the doorstep of many
taxpayers who have fully declared all their offshore liabilities,
often causing confusion and panic amongst the
compliant.
Penalties and traps
The name itself is ostensibly benevolent for something which can
be rather alarming for the recipient and understandably so; given
that HMRC's Nudges carry with them the potential for hefty
penalties if handled incorrectly.
A deliberate and concealed inaccuracy ranges from 100 per cent to
200 per cent of the figure HMRC believes to be outstanding, a
deliberate but not concealed inaccuracy 70 per cent to 140 per
cent and a careless inaccuracy 30 per cent to 60 per cent.
Certificate of tax position
The most sinister component of the Nudge letter, is the
“certificate of tax position.” This actively encourages the
taxpayer to definitively state whether their affairs are covered
by allowance, covered by reliefs, are incorrect, correct, or not
liable for UK tax. Yet there is no limit on the timeframe or
quantum in relation to the information they are positively
affirming. Thus providing an open-ended opportunity for HMRC but
a deep pit for the ill-advised taxpayer to fall into. Both
inaction and action to these letters can result in disastrous
consequences for the taxpayer. The Nudge Letter cannot simply be
ignored. Non-disclosure after receipt of one may be deemed
to constitute deliberate misconduct if it can be demonstrated
that the taxpayer became aware that a mistake had been made, but
made no disclosure of that error.
Action can be just as dangerous. Completing the certificate of
tax position is not mandatory, indeed, this is potentially more
harmful. A taxpayer who completes and signs the certificate of
tax position is warned; that making a false statement is a
criminal offence and they can face investigation and criminal
prosecution for a false statement. There is an important
distinction between the statement that the information provided
'is correct and complete to the best of their knowledge and
belief' and the declaration that they understand the consequence
of making a false statement. The latter relates to all amounts
without any de minimus.
Limited mitigation
Any disclosure after the receipt of a Nudge letter is treated by
HMRC as being “prompted.” Consequently, the taxpayer is then
unable to qualify for full mitigation from any penalties that may
arise as a result of incorrectly filling out their tax return. A
subtle ploy shrouded within the Nudge Letter with a nascent
lucrative result for HMRC? Maybe, the consequence for the
taxpayer is increasing the weight of the financial penalty
attached, for a careless mistake or deliberate false report.
Focus on the vulnerable
Through these letters, HMRC's attack is focused on the more
vulnerable taxpayers who have non-UK or offshore assets. In its
"Helping taxpayers get offshore tax right" discussion document,
HMRC specifically states that the document does not address
“deliberate” avoidance and evasion. Its sole focus, is on
non-deliberate errors.
Why then is there a focus on the more "innocent" of errors?
Many of these errors or discrepancies being targeted are owing to
ignorance or a simple misunderstanding of the UK tax system. The
National Audit Offices report on “Tackling the Tax Gap” published
in July 2020 also highlighted the lack of focus on deliberate
evasion. HMRC's explanation is that it seeks to help taxpayers
get things right - from the outset.
If its aim truly is to "help taxpayers get it right" from
the start, then why the traps? Why entice taxpayers to complete a
non-mandatory certificate of tax position? Why focus on the
seemingly smaller errors? Why penalise those who disclose by
reducing the level for mitigation available? Additional revenue
raising with little effort required on the part of HMRC is likely
to lie at the heart of this approach. Perhaps because there is a
larger and therefore more lucrative pool of the more “innocent”
errors to capitalise on, instead of those who more brazenly and
intentionally flout the rules.
The more logical approach would be to focus on education and
information of taxpayers. Anyone who has spent any time on HMRC's
website will know; there is a vast sea of information presented
in a way which is not easy to navigate for the layperson. Such an
approach requires resourcing though, and at a time when
resourcing is scant, such education programmes are unlikely to be
top of the UK government's agenda.
Other platforms could also be improved. The Worldwide Disclosure
Facility should provide more opportunities for the taxpayer to
produce supporting information and or explanations. There should
be enhanced risk warnings attached to disclosures so that it
clearly flags there are risks in submitting an incomplete
disclosure to taxpayers. Opportunities for early and direct
engagement with an HMRC inspector to discuss complex and
technical issues, and a more timely response from HMRC when
enquiries are submitted would also be a step in the right
direction.
The importance of professional advice
It is strongly advised that those taxpayers who receive a Nudge
from HMRC seek professional tax advice before responding in
writing to HMRC within the assigned 30 days. There is no legal
obligation to complete the “certificate of tax position” and,
given the potential pitfalls available, it is advisable to pause
before doing so. The individual circumstances of each taxpayer
should be carefully reviewed and considered before
responding.