QUESTION: I have received a random letter from HMRC asking me to check my last tax return. Is this a tax investigation?
ANSWER: This letter is referred to as a ‘one to many’ (OTM) letter, ie the same standard letter sent out to many taxpayers. These letters are intended to encourage individuals or businesses to comply with tax regulations or take specific actions related to their tax affairs, in an effort to rectify any wrongs that have been committed previously.
These letters started in 2017, when HMRC started to receive information in relation to overseas bank accounts held by UK residents.
Due to the volume of information received by HMRC they cannot possibly enquire into each case, these OTM letters have been deployed to put the onus on the taxpayers to check returns and if necessary, rectify omissions and/or errors.
A recent example has been taxpayers claiming capital gains tax business asset disposal relief who have already exceeded the £1m lifetime limit due to previous entrepreneurs relief claims.
HMRC have access to many various datasets which it can run crosschecks against its database of taxpayers. For example, if you sold commercial property on February 1 this year for £500,000, the buyer will have submitted a stamp duty return before the end of February and have paid the stamp duty.
This return will detail the seller. If you do not return a capital disposal in your 2023/24 tax return by January 31 2025 then you should expect a tax enquiry because the HMRC computer now cross matches stamp duty returns with corporate and personal tax returns.
The OTM process was extended into the company registry database in November 2022 when HMRC sent one of two OTM letters to over 2,000 persons of significant control (PSCs).
A PSC is an individual who:
- Holds (directly or indirectly) more than 25% of the shares or voting rights in a company; or
- Has the right to appoint or remove most of the directors of a company; or
- Has significant influence or control over the company.
The OTM letters have been issued to PSCs who either have not submitted a self-assessment tax return or who have submitted a return however returned income under £100,000 in the return.
The arbitrary selection of a £100,000 income number is unexplained, but it is believed that HMRC has sent the letters to PSCs who have returned income at a level lower that is expected given their PSC status.
Ironically many owner managed companies typically keep director’s remuneration below £100k to avoid the loss of their personal allowance when income exceeds £100k a point which has probably not been considered by HMRC in their project.
Historically all company directors had to submit SA tax returns, even if they only earned a small amount of income. Now however a taxpayer is asked to complete a return if their dividend income is more than £10,000. For this category of OTM letter recipients, HMRC urges the PSC to register for self-assessment and file a return.
If this OTM letter results in you having to correct your tax filings you may have to either;
Register with HMRC and submit tax returns for the first time, or
- Amend tax returns submitted previously, or
- Disclose to HMRC outside the tax return process
You should strongly consider retaining a suitably qualified and experienced tax practitioner to help you with this process.
- Paddy Harty (paddy.harty@aabgroup.com) is private client partner at AAB Group Accountants Ltd (www.aabgroup.com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor the contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.
