We understand that HMRC have written to about 1,000 high net worth individuals who have been identified as having an effective rate of tax for 2011/12 lower than the “average” for people with similar income.
It is hoped by HMRC that the letters will encourage those who may have underpaid, whether accidently or on purpose, to pay over anything they may owe to HMRC.
The letter is headed ‘your effective rate of tax’ and explains that a person’s effective rate of tax is the percentage of their income they have paid in tax.
The letter then states:
‘Looking at the figures in your self-assessment tax calculation for the year ended 5 April 2012, we can see that your effective rate of tax is lower than the average for people with a similar level of income to you. This could mean that there is something wrong with your self-assessment tax return.’
The letter asks that recipients check their tax calculation for 2011/12 and to contact HMRC if they find that something is wrong.
The letter concludes by reminding the recipient that:
‘Paying the right amount of tax is important, as it helps to pay for public services that we all rely on. Not paying the right amount of tax has serious consequences for these services.’
There is no obligation for the recipient to reply to the letter, although the taxpayer may wish to draw HMRC’s attention to why the effective rate is lower than the average.
Effective rate of tax
As stated in the letter, the effective rate of tax is the percentage of the income paid in tax.
However, the actual rate of tax will depend on a number of factors:
The exact make up of the income, whether predominantly dividends, rents or employment income;
- Whether the personal allowance is still available where income exceeds £100,000;
- How much income falls into the higher rate of tax of 50% for 2011/12 ;
- Whether relief has been claimed for losses;
- Whether payments have been made to charities under gift aid;
- Whether pension contributions have been made; or
- Where reliefs have been claimed such as for EIS or VCT investments.
The letters have prompted concerns from tax professionals and have also attracted the interest of the press.
Although the receiving of a letter does not indicate that HMRC have found anything of concern, merely receiving a letter is likely to prove stressful for the recipient, leading to unnecessary stress and worry, particularly where the taxpayer has not done anything wrong. An unrepresented taxpayer may have no idea what to do next, whereas a taxpayer who has used an agent to file a return may assume that the agent has made a mistake (leading to unnecessary and possibly difficult phone calls to the agent).
The tone of the letter is likely to cause unnecessary distress to recipients who may well be fully tax compliant and a taxpayer who has paid the tax they owe should not be made to feel they have not paid their fair share.
Although there is no obligation to reply to the letter, the fully-compliant taxpayer may wish to write to HMRC and explain the lower than expected effective rate. This is time consuming for the taxpayer and where the agent replies on the taxpayer’s behalf will result in the taxpayer incurring an unnecessary cost
The letters relate to 2011/12, a tax year for which the enquiry window for those who filed their tax returns on time is now closed. Sending the letters will create an opportunity for HMRC to try and recover more tax for 2011/12 without the expense of invoking the discovery provisions and without having to find a concrete reason to enquire into the return, which effectively amounts to a fishing expedition.Top of Form