The HMRC has written to selected taxpayers to tell them their effective rate of tax is lower than average and asking them to check if it’s right. The tax payers’ agents will get a copy (i.e. their accountants).
This is one of a number of letters which HMRC has been using in an attempt to ‘nudge’ potentially non-compliant taxpayers to “sort things out”.
The letters are believed to have been sent to about 1,000 high net worth individuals. They are titled ‘Your effective rate of tax’.
The letter reads as follows:
“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.
To be honest we, as tax agents, are concerned about these letters:
- There are many reasons why the effective rate of tax may be low for a particular taxpayer for a particular year – e.g. reliefs claimed for losses, EIS investments, gift aid payments or pension contributions. The letter makes no mention any of these. Did HMRC check for such items on the tax returns they chose before writing to the taxpayer?
- Most taxpayers will have no idea what is meant by “effective rate of tax” and will worry. The letter gives no examples of possible errors which might lead to an incorrect tax rate. The unrepresented taxpayer will not know where to start checking.
- If the taxpayer is represented, the taxpayer may think that their agent has got their tax return wrong? HMRC has regularly said how essential agents are to the tax system then starts casting aspersions on their abilities through clumsy letter drafting.
- The letters are about tax year 2011/12, for which (for the vast majority of taxpayers) the enquiry window is now closed. Plus, there is no apparent mechanism to open an enquiry?
The text of the letters were not shown to the professional bodies representing tax agents beforehand. The poor drafting and lack of clarity could have been avoided had they done so. 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’.
If you have received one of these letters and are concerned – please do contact your tax adviser or accountant before responding to HMRC. If you don’t have an agent acting for you – please feel free to contact me on 01788 577613 or by email on email@example.com
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