Most people are trying their best to get their taxes right and file an accurate tax return to HM Revenue & Customs each year.
Often perceived as a chore, it can slip down the “to-do list” and become a last-minute panic. Financial advisers will be part of the team of people encouraging their clients to get tax returns done and keep HMRC satisfied for a peaceful life.
Where matters do go awry, this can trigger a routine enquiry from HMRC, or worse still, a full-blown investigation.
As well as the bad feeling this can create, all advisers may well be asked to provide extra information and backing documents or explanations to support their client’s UK tax position in any dispute with HMRC.
Therefore, it is important to understand the common traps that taxpayers fall into. Below are 10 frequent “flash points”, where even sophisticated and financially astute taxpayers can be caught out.
1. Assuming logic or common sense
The UK has one of the largest and most complex tax codes in the world. In terms of volume, it is estimated to cover 18,000 pages of tax laws.
In addition, there is HMRC guidance, case law from the tax tribunal, and best practice advice from a tax agent.
Making any assumptions, including thinking that it must be logical or in any way “common sense”, can be dangerous. The rules change regularly and often do appear illogical.
A good example is the taxation of life insurance bonds prior to rule changes triggered in Lobler vs HMRC [2015] UKUT 152 (TCC): advisers will remember that despite small investment gains, the taxpayer was liable to tax, on surrenders under the policy, that vastly exceeded his economic gains from the policy.
Although this particularly penal approach to taxing life policies has now been mitigated by new legislation, opportunities to misunderstand how UK tax law works still abound and the consequences of tax law can appear uneconomical or counterintuitive.
2. Missing time limits
There are around 1,000 different allowances and reliefs in the UK tax system and each one has a potentially different and strict time limit, so it is crucial to track these.
This can be confusing and often missed in practice by both unrepresented taxpayers and those who use basic tax return preparation services.
Unfortunately, this can also lead to serious financial consequences. For example, in my work to help clients resolve tax disputes, I regularly find that clients who have slipped into difficulties with HMRC over a number of tax years have overpaid tax, as well as underpaid it.
The problem is that when it comes to claiming overpayment relief, there is a strict four-year time limit: cases of exceptional circumstances have been tested through the tax courts, with very few resulting in a late claim being accepted.
