HMRC check into Child Benefit omission from Tax Return
Written by Ray Coman
An HMRC check into the Self Assessment Tax Return for the year ended 5 April can be caused by exclusion of child benefit. Under Section 9A of the Taxes Management Act 1970, HMRC have the power to make a check and the enquiry can be based on information obtained from other sources. In this report we advise on cases in which HMRC compare a tax return with information that they have received from the Child Benefit Office.
In this type of enquiry, HMRC check the exclusion of the High Income Child Benefit Charge from a Tax return. The letter of enquiry usually asks the taxpayer to agree to whether the assessment of additional liability is correct and if so to tell them by telephone or in writing why the Tax Return is wrong. A response deadline is usually set about 30 days from the date of the letter.
Based on our experience, this report intends to allay understandable concerns on the part of the taxpayer. It is not intended to be used as a method to ‘play the HMRC system’, but rather to prepare properly for the telephone meeting. Hopefully, the insight below will encourage the taxpayer to come forward and therefore avoid the higher penalty that could apply by ignoring the request for information.
On contacting HMRC, the taxpayer will typically be asked to carry out a questionnaire, known as a behaviour audit. Initially, HMRC would seek to establish that the taxpayer agrees with the HMRC assessment of income. Please refer to the High Income Benefit Charge report to determine whether the assessment is accurate. Typically, the automated calculation carried out will not be incorrect. If the recipient is an ex-husband or wife who lives separately, there could be cause for appeal. The second purpose of the audit is to establish why the tax return was incorrect.
HMRC would seek to establish whether there any personal circumstance or health issues that they should be aware of. Only consider an appeal based on medical condition if chronic or family bereavement if there is cross referenced documentary evidence to substantiate the claim. As explained later in this article, it may not be necessary to rely on this as a reasonable excuse and therefore should only be introduced if serious and substantiated.
HMRC will also wish to establish the method that the Return was filed. The aim is to understand if there was any technical or logistical fault which caused the error. HMRC will ensure that the Return was filed online and, if the taxpayer used an accountant, that the Return was approved or electronically signed with that tax agent. It would be counter-productive to introduce a reason of technical fault unless it is a very well documented that the original Return was without error. Something regarded as a waste of HMRC resource could worsen the outcome.
HMRC will seek to clarify whether the taxpayer was aware of the charge. Coman & Co would not even insinuate that a taxpayer should break the law by being dishonest. However, if a taxpayer was not aware of the charge, this should be emphasised. The objection of a taxpayer to paying tax should not be brought to lawbreaking level. Unfortunately, HMRC would penalise a deliberate attempt to underpay tax, especially if this was concealed for instance with false documentation.
Ignorance is a reason but not an excuse. A taxpayer is advised to be courteous and respectful towards all HMRC staff. If Child Benefit was supposed to be reported on the Tax Return and it has not been reported, the error is careless. The best policy is to admit that it was a mistake and not to be argumentative with the HMRC caseworker. An awkward approach will, at best, not help the outcome of the case.
HMRC will also seek to establish whether the taxpayer is continuing to receive Child Benefit and that the income is over £50,000. A requirement to file a Tax Return will continue for as long as there is High Income Benefit charge to report.
It is likely that HMRC will judge that the taxpayer has not taken reasonable care. The Tax Return will usually be amended to include the additional liability. If HMRC have stated that the assessment for that tax year has changed, there is no need to file an amendment. HMRC will also add interest to the tax liability, which is applied from the due date to the payment date.
The penalty applied to the liability is 15%, based on the taxpayer not taking reasonable care. However, subject to certain conditions, this penalty can be suspended, usually for 12 months. The suspension is concessionary and not automatic. Crucially, a penalty suspension will depend on cooperation with HMRC. Failure to respond to the HMRC request within the specified time will be regarded as uncooperative and therefore the higher penalty will stand. If HMRC have sent out a reminder, the penalty implication would be more serious, but the reminder should not be ignored. The letter from HMRC will include a deadline by which to send a reply.
The condition of the suspension is that the High Income Benefit Chare is reported, if applicable, on Tax Returns in tax years subsequent to the enquiry year. It will also be dependent on settlement of the outstanding amount plus interest. A taxpayer should consider prompt payment and future compliance as the best method for displaying a cooperative attitude and keeping penalty to a minimum.
If the Child Benefit has ceased, the penalty cannot be suspended. This is because there is no liability from which to base a decision about whether the taxpayer has been co-operative. Most likely a 15% inaccuracy penalty will apply.
A closure letter from HMRC is typically issued within a week and will arrive subject to postal service. The letter will set out the liability, penalty and interest, and provide payments instructions.
Coman & Co have extensive experience of dealing with HMRC, including tax enquiries. Matters such as Child Benefit are often straightforward. It can be daunting receiving a letter of enquiry from HMRC. The pressure of the situation can cause a taxpayer to make a statement which is both incorrect and not helpful to the situation. Coman & Co can help to bring about a prompt resolution to make the process less stressful for both HMRC and the client.