HMRC has launched a new consultation 'The Tax Administration Framework Review: New ways to tackle non-compliance'. This invites views on whether HMRC’s approach to correcting taxpayer inaccuracies in a claim or return could be improved.
HMRC state that a large proportion of the tax gap is attributed to individuals and small businesses, with smaller amounts of tax due from a large number of taxpayers. It is estimated that around 30% of those in self-assessment and 40% of small companies have some form of inaccuracy in their tax return.
The consultation recently published considers two areas for potential improvement to tackle this issue:
- Changes to HMRC’s existing powers and processes.
- A new power to require taxpayers to correct mistakes themselves.
Reform of existing powers
Three broad areas for reforming HMRC's existing powers are suggested.
1. Amendment to the conditions for making claims
- There is a balance between promptly making payments to taxpayers and identifying errors and invalid claims.
- Changes in some areas have already been introduced to require greater upfront information, such as with Research and Development tax reliefs.
- This helps HMRC make better judgements when claims are received and therefore payments are able to be processed and paid more promptly with certainty.
- The consultation suggests that extending similar provisions to other claims and reliefs could give HMRC a stronger basis from which to risk-assess claims and reliefs.
- It is noted that this proposal must be balanced against additional time and cost burdens imposed on taxpayers who would need to routinely provide more information when submitting a claim.
2. Reform of Revenue Correction Notice (RCN) conditions
- HMRC can correct, via an RCN, a taxpayer’s direct tax return within 9 months of its submission where HMRC has reason to believe the return is incorrect. A taxpayer can reject any such amendments.
- There are differences in the RCN conditions, and taxpayer rejection processes, across the tax regimes. Suggested simplifications include:
- Aligning the conditions and applying one method of rejection across all relevant regimes.
- Introducing a requirement for HMRC to explain why it is making a correction and for taxpayers to provide evidence to support their rejection.
3. Introduction of a partial enquiry
- Currently, the steps which must be undertaken by HMRC to open and close an enquiry do not depend on whether any mistake is complex or straightforward, high or low in value. HMRC may only enquire into a tax return once.
- The consultation suggests that there may be occasions where the ability to open an enquiry into a specified issue, without affecting the ability to enquire into the full return at a later stage, could be beneficial.
- An example given is where taxpayers have claimed relief or are awaiting payment for relatively small amounts.
- The consultation suggests amending existing enquiry powers to:
- Enable HMRC to open a partial enquiry into a specific issue or section of a return. The issue would be stipulated in a new ‘partial enquiry notice’ and the checks would be related to that issue only.
- Have obligations on HMRC to work within specified time limits, subject to deadlines being met. There would be a reasonable expectation that the issues worked under this notice would be able to be worked on and resolved quickly.
- Not affect the normal enquiry window and be subject to appropriate governance, in order to prevent usage that might be perceived as unfair. This might include an obligation on HMRC not to re-open any risk that had already been dealt with under a partial enquiry.
A new power to address non-compliance
The consultation proposes a new HMRC power be created, requiring taxpayers to self-correct errors. It would work as follows:
- HMRC would identify returns or claims with issues that have common features.
- Examples could include several similar errors submitted by the same agent or discrepancies between third-party data and the tax return.
- Where there is evidence the issue might apply to a taxpayer, HMRC would issue a new taxpayer self-correction notice.
- This notice would detail the issue and the reason why HMRC believes this has a high likelihood of affecting the taxpayer
- The taxpayer would have a legal obligation to respond to the notice by amending their return or claim within a set period or providing an explanation as to why no amendment is required.
It is suggested that the new power could be used where other approaches might seem disproportionate, such as one-to-one enquiries for small amounts.
- Proposed sanctions for those taxpayers who do not respond to the notice within the specified period include additional monetary Penalties or further action, such as HMRC opening enquiries.
- To encourage compliance with a new regime, incentives might include reducing penalties under certain conditions or providing the taxpayer with an assurance that no further checks on the specific risk would be required.
- The consultation notes that taxpayer safeguards would be required to ensure fair and legal treatment. These include the need for:
- Clear and reasonable grounds for believing the recipient had made an error on a tax return or claim, before issuing a notice.
- Appropriate channels for dispute resolution in cases where the taxpayer and HMRC disagree on the taxpayer’s response, for example, on whether a correction is needed or not.
The consultation closes on 22 January 2025. Responses may be sent by e-mail.
Consultation questions
- What are your views on introducing additional information requirements to other claims for tax reliefs and allowances?
- Are there cases where this approach would be particularly helpful for customers?
- How could any additional administrative costs be kept to a minimum?
- What are your views on aligning the conditions for when HMRC can make corrections so that they are the same across relevant regimes?
- What are your views on aligning the ways that revenue correction notices can be rejected, so that they are the same across relevant regimes?
- What are your views on introducing a mandatory requirement for taxpayers to provide evidence to support a rejection of a revenue correction notice?
- Do you think this requirement should extend to HMRC explaining why a correction was made and what evidence is required?
- What other ways could the revenue correction process be improved?
- What are your views on introducing a partial enquiry power to allow an enquiry into a specific issue?
- In which circumstances do you think such a power might be deployed, and what would you see as appropriate taxpayer safeguards?
- What limitations do you think should be attached to the use of this power and why?
- What are your views on how this power could be used? Where do you think this power could be applied most and least effectively?
- What are your views on the merits and challenges of requiring taxpayers to respond to the new notice and correct their own return?
- What are your views on reasonable timeframes for a taxpayer to respond to a taxpayer correction notice and, subsequently, for HMRC to confirm its position?
- In addition to the above, what else might HMRC need to take into consideration when designing obligations?
- What are your views on any potential impacts, costs or burdens of introducing this approach?
- What do you think would be an appropriate consequence for non-compliance with a notice, and what factors should HMRC take into consideration?
- What incentives could HMRC provide to encourage the taxpayer to comply with a notice in the specified timeframe?
- What are your views on the potential benefits and risks to this approach: for taxpayers, agents and HMRC?
- What do you believe would be appropriate and proportionate taxpayer safeguards?
Useful guides on this topic
Penalties: Errors in Returns and Documents (subscriber version)
What penalties apply if you make an error or mistake? Is there a penalty if you fail to tell HMRC about an under-assessment? How are penalties calculated? How do you check penalties? What can you do if you receive a penalty?
How to appeal an HMRC decision
Disagree with an HMRC decision? How do you appeal, what type of decision can you appeal and what are your different options when you disagree with HMRC? What are the key steps in making an appeal?
Discovery Assessments
When can HMRC issue an assessment outside of the normal statutory time limits? What conditions must be met? Can HMRC issue two alternative assessments for the same period? What are your rights of appeal and defences?
Client guide: Reasonable care and tax penalties
What triggers a tax penalty? What standard of care is expected from a taxpayer? What is reasonable care? When is an error careless?
Statutory Review (by HMRC)
What is a Statutory Review? When does HMRC offer a Statutory Review? Is it automatic? What happens in a Statutory Review? Can you challenge a Statutory Review's findings? Can you influence a Statutory Review? When does HMRC offer a Statutory Review?
External link
HMRC consultation: The Tax Administration Framework Review: New ways to tackle non-compliance
