Mark McLaughlin looks at the HMRC consultation on expanding its existing powers and introducing a new one in respect of self-assessment returns.
When the self-assessment regime for individuals was first rolled out in the mid-1990’s, one of the underlying principles was that HM Revenue and Customs (HMRC) officers had ‘one bite of the cherry’ when it came to tax return enquiries.
This certainty was an important safeguard. As HMRC’s PAYE Manual puts it (in its PAYE Manual, at PAYE80001): ‘When Income Tax Self Assessment (ITSA) was first introduced, the Department was very successful in instilling the message that we only have ‘one bite of the cherry’. This stressed to all staff that any action they may take must not jeopardise a potential Section 9A TMA 1970 enquiry. A review of this work found that, as a result, the majority of staff are reluctant to query anything that looks incorrect or doubtful, in case their actions prevent a future enquiry.’
Subsequently, a power was introduced (in FA 2001) allowing HMRC officers to amend self-assessment returns to correct obvious errors in returns, or ‘anything else in the return that the HMRC officer has reason to believe is incorrect in the light of information available to the officer’, generally within nine months of the return being filed (for simplicity, this notice is referred to here as a ‘revenue correction notice’ (RCN)). The purpose of RCNs is broadly to obviate the need for HMRC to open a formal tax return enquiry to facilitate an amendment to the return. However, taxpayers may reject the correction by giving notice of their rejection to HMRC within 30 days of the correction notice (TMA 1970, s 9ZB for individuals and trustees; TMA 1970, s 12ABB for partnerships; FA 1998, Sch 18, para 16 for companies).
In addition, HMRC’s information and inspection powers (FA 2008, Sch 36) provide that an HMRC officer may by notice in writing require a person (‘the taxpayer’) to provide information, or to produce a document, if the information is reasonably required by the officer for the purpose of checking the taxpayer’s tax position (or collecting a tax debt of the taxpayer). Circumstances under which HMRC may use these powers following the submission of a return broadly include where an HMRC officer has reason to suspect that an amount that ought to have been assessed may not have been assessed, or where an assessment may be insufficient (FA 1998, Sch 36, para 21(6)).
HMRC can also launch ‘One to Many’ campaigns (or ‘nudge’ letters) where it identifies certain types of risks that can be managed by contacting multiple taxpayers to highlight potential errors in their returns and asking taxpayers to correct them, without HMRC necessarily commencing a formal enquiry.
HMRC is now considering reforms to its existing powers and processes, and introducing a new power requiring taxpayers to correct mistakes themselves. A consultation document (‘The Tax Administration Framework Review - new ways to tackle non-compliance’) was published at the time of Autumn Budget 2024. In broad terms, the proposed measures are:
On the potential introduction of partial enquiries, HMRC acknowledges the existing tenet under self-assessment of one enquiry into a return. HMRC indicates that this power might include an obligation on HMRC not to re-open any risk that had already been dealt with under a partial enquiry. However, many taxpayers and advisers will see partial enquiries as an erosion of the ‘one bite of the cherry’ principle on which self-assessment was originally based in part. If such enquiries are to be introduced, it is to be hoped that the power will be subject to appropriate limitations and robust safeguards.
HMRC’s rationale for the proposed new correction power is that it could be used ‘where other approaches might seem disproportionate, such as one-to-one enquiries for small amounts.’ However, the use of this power would presumably involve HMRC officers exercising their judgement as to whether the information held warrants the exercise of the correction power, and what constitutes a ‘small’ amount of tax in the context of a particular taxpayer. Once again, appropriate safeguards will be important. However, notwithstanding any statutory right that the taxpayer may be afforded to explain to HMRC why no amendment is required, it is not difficult to envisage correction notices resulting in disputes between taxpayers and HMRC in some instances. Thus, there would presumably need to be the usual dispute resolution channels, such as review and appeal rights for the taxpayer in relation to a contested notice.
HMRC is considering a ‘carrot and stick’ approach to the proposed taxpayer self-correction requirement for self-assessment returns. The ‘stick’ might include additional monetary penalties, and/or HMRC taking further action such as the opening of a formal tax return enquiry. The ‘carrot’ might include reduced penalties in some cases. An additional incentive according to HMRC might be an assurance that no further checks on this specific risk would be required for the return in question; however, this should surely be a statutory safeguard, rather than a discretionary ‘incentive’ offered by HMRC?
Generally speaking (and with apologies for the slight cynicism!), when HMRC proposes enhanced or new powers, there are altruistic reasons to make the powers more palatable, and underlying (or real) reasons. For example, HMRC states in the consultation document: ‘Over recent years, HMRC has observed a significant increase in taxpayers making inaccurate claims for relief or having inaccuracies in their tax returns. Collectively, these amounts add up, costing significant amounts of public money needed to pay for the schools, hospitals, and other essential services we all rely on.’ In addition, HMRC states that the proposed changes are ‘designed to make it easier and quicker for taxpayers to put things right, while helping HMRC collect the right tax more effectively and efficiently.’
However, it might be argued that the real reason for the proposed changes is simply to help close the tax gap by allowing multiple bites of the cherry (e.g., by allowing multiple RCNs for the same taxpayer, in respect of different areas of the same tax return, possibly prior to a formal enquiry into the remainder of the tax return). The reasons given by HMRC might be seen as justification for a ‘powers creep’, eroding the safeguards and protections that supported the original ethos of self-assessment.
The consultation closes at 11.59pm on 22 January 2025.
For commentary on tax return interventions and enquiries, see Guide to Taxpayers’ Rights and HMRC Powers at Chapter 2 (Tax returns) and Chapter 3 (Enquiries and other interventions).
