HM Revenue & Customs has invited wealthy taxpayers to take part in a “pre-filing” conversation this autumn ahead of completing their tax return, a move that advisers warn could put them at unnecessary risk.
In a pilot scheme launched in April, the authority is asking up to 1,000 individuals with incomes exceeding £200,000 and assets of at least £2mn to have a voluntary phone call with HMRC to help prevent errors in tax filings before they occur.
HMRC told the Financial Times the calls “will help us and the customer ensure they pay the right tax” by discussing “unusual or one-off transactions, uncertain tax treatments and changes in their circumstances which have an impact on their tax affairs”.
Experts cautioned that while HMRC’s efforts were well intentioned, those engaging with the authority before filing a tax return could set themselves up for a trap by raising a dispute before it occurs.
“If the taxpayer discloses something that HMRC doesn’t agree with, they could risk higher tax geared penalties,” said John Hood, a tax partner with accountancy firm Moore Kingston Smith and an ex-HMRC tax inspector.
A disputed tax liability carries a penalty of 15-30 per cent of the tax owed. Hood said HMRC was “increasingly blurring the lines between careless and deliberate behaviour” and if it considered that a return was knowingly incorrect the penalty would be 35-70 per cent of tax owed.
Hood encouraged taxpayers to “resist HMRC’s sirens’ call” and stick to the traditional route of submitting a tax return and an explanatory note.
Dhana Sabanathan, partner at law firm Winckworth Sherwood, said that generally she did not encourage those invited to attend these meetings, but if they want to she recommended doing so with an adviser.
“Tax rules are complex and it is easy . . . to use the wrong terminology, resulting in misunderstandings,” she said.
The call for pre-filing conversations is targeted at high earners with complex tax affairs, regardless of whether the taxpayer already has an adviser or a customer compliance manager at HMRC.
In one of the letters seen by the FT in which a taxpayer was invited for a pre-filing conversation, HMRC said the call would not constitute tax advice and did not guarantee that it would not carry out a check after the tax return was filed.
Dominic Arnold, head of tax dispute resolution at wealth manager Evelyn Partners, questioned whether facilitating pre-filing discussions was a good use of HMRC’s severely stretched resources. Delays of two to three months are currently “not unusual” when waiting for a response to letters to HMRC.
“Getting through the backlog is where the focus should be,” said Arnold, adding that “in most circumstances it won’t be necessary to have any pre-filing discussion. In reality that is what our clients pay us to do”.
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John Barnett, chair of the Chartered Institute of Taxation’s technical policy and oversight committee, added that while co-operation with HMRC was “always a good thing”, he described the move by the authority to arrange calls with taxpayers and their advisers as a “subtle undermining of the relationship between the adviser and the client”.
The Institute of Chartered Accountants in England and Wales recommended that if a taxpayer wished to take up HMRC’s offer, there should be a pre-discussion with the authority to clarify what topics are going to be covered, who will attend from HMRC and what the expectations about next steps are on both sides.
Mike Hodges, partner at accounting firm Saffery Champness, said that this “pre-pre-filing discussion” might make “the conversation itself a little stilted”.