Life is getting tougher for taxpayers holding capital assets, with HMRC tightening the screws regarding reporting mistakes, any non-disclosure (inadvertent or otherwise) and tax returns filed late.
Bigger fines and interest penalties are being levied on individuals in the tax authority’s drive to add to the UK’s coffers, given fresh impetus by the new chancellor of the exchequer Rachel Reeves.
She has committed to funding more investigations in a blitz on ‘missing’ tax receipts, aiming to pull in an additional £5.1bn a year by 2029.
So there is no time to waste for financial advisers working to keep their clients on the right side of their tax liabilities. Especially with the potential changes to capital gains tax that industry commentators are expecting to surface in the Autumn Budget on October 30.
It must be said there is quite a bit of unfairness in the tax self-assessment system. It is a sacrosanct principle at HMRC that the taxpayer bears full responsibility for the data entered on their tax return.
Alas, there is enormous complexity involved. While how the tax office operates to ensure the right tax gets paid understandably remains confidential, some data must come in from investment providers with investors’ names attached, for cross-checking with what is reported on the taxpayer’s return.
What is more, we can only guess at how HMRC manages to reconcile data flowing across multiple internal systems. Yet the information shared with investors by financial institutions – whether onshore or offshore – can vary between sketchy and overwhelmingly complicated, resulting in the individual not being best placed to assess their own tax liabilities.
Let’s take one simple example to illuminate the core issue.
The investor puts money into an investment fund via their general investment account as guided by their adviser. The fund buys stocks and shares as part of a growth strategy. When any dividends are received they are reinvested, yet these earnings are taxable and the taxpayer is responsible for reporting them via self-assessment.
However, there are limited incentives for the fund provider to inform the investor about their tax-reporting liabilities. The assumption can be that this is left to the investor’s accountant.
Several specific instances come to mind where taxpayers can be or have been left in hot water with HMRC having been kept in the dark about tax implications. For brevity, I will mention just a couple here.
More individuals have been investing in offshore funds but then falling foul of non-disclosure because they are not aware they have something to disclose. This is amid HMRC clamping down on non-compliance and the inaccurate reporting of offshore investment that could be subject to excess reportable income.
Tax return errors involving ERI can result in a penalty of up to a massive 200 per cent of the tax owed. Yet the maximum penalty for an offshore reporting fund in serious breach is that it leaves the reporting fund regime right away – and fund managers face no direct penalty for failure to comply.
