KS Private Client Services news update

11th November 2011

HMRC Enquiries - HSBC Swiss Accounts

HMRC are writing directly to UK individuals, trusts or companies whom they believe to hold or have held accounts in Switzerland with HSBC. Some 6,000 customers of HSBC are being targeted.

These letters will apparently refer to specific account names and numbers, and responses will be expected within a short period of time either to confirm that returns have been properly and fully completed or to commit to making a full disclosure.

Where a response is not received, HMRC will be using their full range of statutory powers and may consider cases for criminal prosecution. Where penalties become an issue these may be up to 200% of any tax involved.

Clearly, where the relevant accounts have been properly disclosed (or perhaps not required to be disclosed e.g. for non doms not remitting income or gains) this will have to be explained to HMRC.

Where there may be possible failures to disclose then very careful consideration will be needed to decide upon the most appropriate steps and the best way to make any disclosure to HMRC. This could be under the Swiss Agreement, the Liechtenstein Disclosure Facility or by other routes.

Either way, some prompt action will be needed to establish the true position and to manage the situation with HMRC.

HMRC Enquiries – other initiatives

The letters on Swiss accounts is just one of an ever increasing number of initiatives by HMRC to track down undeclared income and gains and recover tax that they believe should have been paid.

Other areas on which HMRC are concentrating through specific task forces include:-

• Wealthy individuals owning property abroad, especially where there may be reason to believe income is not being declared or the means of affordability may be in question
• Commodity traders
• Scrap metal dealers – especially in Scotland
• Construction industry businesses and individuals in the North West - specifically on suppressed sales and over claimed expenses
• Taxpayers in the South East not submitting returns on time for PAYE, Corporation Tax, Income Tax or VAT
• Landlords in the North West or North Wales with three or more properties who may not be fully declaring rental income
• Fast food outlets in Scotland understating the true level of sales
• Various ongoing activities in respect of offshore income and gains.

The above are all directed to specific areas identified as high risk from HMRC’s viewpoint. We are also seeing more routine enquiries on possible omissions or oversights on returns in respect of e.g. bank interest, gains on life policies, student loans, pension income, P11D benefits etc.

With this ever increasing attention to enquiry and investigation work by HMRC, across all taxes, along with a more stringent penalty regime, it is becoming even more important to ensure that any returns are completed with reasonable care as to their accuracy and completeness and submitted within the relevant time limits.

While HMRC do have access to a great deal of information from other sources and a much greater ability to cross check to taxpayers’ records than in the past, in our experience they are by no means always right. For example, a significant proportion of the enquiries we have concluded relating to queries about bank interest possibly not declared have resulted in no adjustment being due. In a number of other instances it has been possible to negotiate lower penalties than those originally suggested by HMRC and in some cases no penalty at all.

PAYE codes and 2010-11 tax underpayments

There was considerable fuss around this time last year when HMRC’s PAYE reconciliation process generated a very large number of under and over payments of tax from 2009-10 and earlier years.

This same process is now under way for 2010-11 and, while there are seemingly fewer problems than last year, there are apparently more than 1 million letters being sent to taxpayers who have underpaid tax through PAYE and repayments have been made to over 2 million people who overpaid.

To some extent this is an inevitable consequence of the limitations of the PAYE system in the modern world, especially where someone has employment or pension income from several different sources.

This reconciliation process is not meant to affect those who file self-assessment tax returns but, due to a lack of co-ordination between HMRC computer systems, some self assessment taxpayers will receive calculations of supposed over or under payments that do not include non PAYE income and are therefore inevitably wrong.

In other cases calculations have been made using estimates of e.g. bank interest, other income or deductions that are based on the past year’s details and, again, are likely to be incorrect.

As part of the attempts to reduce the number and extent of these under and over payments HMRC are now issuing updated tax codes on a more frequent basis. In the past they have tended to issue codes shortly before the start of a tax year (so for 2011-12 codes were generally issued in January/February 2011) but they are now being amended where additional information is returned on, e.g. P11D forms for the 2010-11 year (using those figures as estimates for 2011-12) and personal self-assessment returns where estimates of other income are being updated.

There are, though, some glaring errors in these updated codes. Some of the information is based on detail from several years ago. In some cases this has meant codes including reliefs or deductions no longer applicable or in amounts that are wholly inconsistent with the current position. In some particularly unfortunate cases married couples allowance has been shown where the taxpayer has been a widow or widower for some time.

Anyone receiving an amended code should look to check that it does reflect their current circumstances, as this will have a bearing on any under or over payment that may arise in the current tax year. It will also directly affect their current net pay on a weekly or monthly basis.

There are two changes in HMRC’s practice on the operation of tax codes that will reduce many underpayments for higher earners. In 2010-11 there was limited ability to collect tax at 50% where someone had more than one job. There is now a new 50% code that can be applied in such cases.

Secondly, where payments are made after someone has left an employment, so e.g. on taxable termination payments or share options exercised after leaving tax used to be deducted at only basic rate. This could create substantial underpayments for those taxable at higher rates. Tax is now deductible using an 0T code, which is a code with no allowances and collects tax at various rates, if necessary up to the 50% rate. This may now have the effect of over deducting tax and lead to an over payment come the end of the tax year.