HMRC are issuing discovery assessments to people they believe should have submitted a 2018/19 tax return containing or undervaluing loan charge amounts.
The implementation of the loan charge has been controversial, and many people see it as profoundly unjust and unfair to taxpayers who were encouraged to take part of their wages as a loan. HMRC estimate that there are approximately 61,000 people directly affected by the loan charge, based on actual cases identified.
Individuals who received disguised remuneration as loans on or after 6 April 2016, which were not repaid by 5 April 2019, were required to declare the loan charge on their 2018/19 tax return. They were given an extended period to do this – until 30 September 2020.
Where individuals submitted no tax return for 2018/19, HMRC has issued determinations to those individuals.
Where the 2018/19 tax return was submitted but did not include the loan charge, or HMRC believe that the taxpayer included an inadequate loan charge, it is now raising discovery assessments under TMA 1970 s 29.
HMRC use the discovery route where the normal enquiry window for a tax return has closed, which it has done for the 2018/19 tax returns, even for those submitted up to 30 September 2020.
The discovery powers allow HMRC to open a tax return for enquiry for up to four years after the submission deadline, or six years if the tax loss is due to careless behaviour by or on behalf of the taxpayer, or 20 years where there is a deliberate error.
The discovery assessment may not be accurate or valid, so the assessment should appeal alongside a request to postpone the tax due. Our tax investigation experts can help with this.
What should I do?
If you receive a discovery assessment – do not ignore the document.
HMRC has included guidance on how to appeal in the discovery assessments they have sent out in their letters.
Essentially you have two options either pay the amount assessed or appeal it. Any appeal should include asking HMRC to postpone the tax. This should be done within 30 days of the date of the letter. Although late appeals are possible only on a case-by-case basis
If you do not appeal or do not request HMRC to postpone the tax. You will need to contact HMRC within 30 days of the date of the letter (or try and make a payment arrangement. Where you fail to do so, HMRC will ordinarily start debt recovery proceedings.
If you want to appeal, you can appeal either the validity of the assessment in its entirety or just based on the numbers that HMRC have assessed. Your assessment should have included a schedule detailing how HMRC has calculated the additional tax based on information available to them.
Sometimes the amount will be overestimated as HMRC may need complete and reliable information about your loans. They may also need to be made aware of your exact circumstances and any reliefs, etc., available to you. When dealing with disguised remuneration, HMRC often makes assumptions about the level of income and loans received if this is the case, can you show the figures as incorrect? Lastly, are you entitled to spread the additional income over several years, and if so, has HMRC correctly reflected this?
As mentioned above, if you appeal, you can ask for payment of all or part of the disputed tax to be postponed. Such an appeal would mean you would not have to pay the amount assessed while the appeal is being dealt with. However, interest will continue to run.
A letter of appeal is initially to be sent to HMRC. However, if you and HMRC cannot resolve the matter, you can appeal further to the independent Tax Tribunal. Although there are strict time limits for notifying Tribunal, you have the right to inform the Tribunal of your appeal as soon as you send the letter to HMRC.
A common question we get from our clients who are under enquiry is why they did not open an investigation earlier if they thought my return was wrong.
Concerning the loan charge, given its background and the high profile/sensitive nature of the issue, it is not unreasonable to expect HMRC, wherever possible, to have opened an enquiry under ordinary rules.
Even if there is no legal challenge available against the actual discovery assessment, a judicial review could be an option if you feel that HMRC has acted irrationally or unreasonably or a legitimate expectation has been breached.
A judicial review examines the legality of decision-making by public bodies and can be a powerful tool when used right. Strict time limits are in place for commencing judicial review procedures, and they are customarily heard either in the High Court or, in Scotland, the Court of Session. Therefore, it can be expensive, and expert legal representation is usually needed.
I am in the process of settling but still received an assessment
Even if you are in the process of settling, you may not decide to conclude the process. In such a case, the discovery assessment allows HMRC to protect its position and recover the tax they say is due later.
When you have completed the settlement process, HMRC should withdraw the assessment. It is advised that this forms part of the settlement terms.
What is the bottom line?
If you have received a discovery assessment, you should seek specialist tax advice and assistance with drafting any appeal against these discovery assessments as soon as possible to ensure that you respond within the required time scale.
If you or anyone you know has been affected by the loan charge or has received a discovery assessment. Contact us today to discuss how we can provide you with the proper support and assistance.
All information provided in this article is for informational purposes only and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional accountant. It should in no way be considered as advice provided by Hawthorne Tax Consultancy or any of its principals. All information is deemed to be correct at the time of writing.