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Received a 2018/19 tax return penalty or enquiry notice and do not know why? Think: loan charge
The date of 30 September 2020 was the deadline by which those affected by the loan charge (who did not agree a settlement with HMRC), had to report the loan charge on a 2018/19 tax return and pay the tax due (or arrange a payment plan). HMRC are now issuing penalties to those that did not file a return and opening enquiries into tax returns filed without the loan charge. Here we explain the penalty position and what an enquiry may mean for you.
HMRC recently published figures suggesting that 12,000 people who were expected to file 2018/19 ‘loan charge’ tax returns have not done so and that a further significant number of people did file tax returns, as requested by HMRC, but without the loan charge.
Some people affected by the loan charge will have been put into loan schemes by the ‘umbrella companies’ they were working through, without their full knowledge or understanding. It is therefore likely there are some individuals who still do not recognise themselves as being affected by the loan charge, let alone be able to fulfil their tax filing and payment obligations.
If you have received a 2018/19 tax return penalty or enquiry notice and don’t know why, it is possible that HMRC have received some information from a third party (such as the umbrella company) that suggests that you may have been paid through a loan scheme. This means they were expecting you to report the loan charge on a 2018/19 tax return.
As HMRC are taking action against those that failed to do this, it is now very important that you think carefully: do I have any loan charge issues? In our previous article ‘Worked through an umbrella company in the past? You should check whether you need to do anything about the loan charge’ we explain what the loan charge is and tell you how to check whether you need to do anything about the loan charge and if so – what.
If you do not have any loan charge issues or if you are unsure as to why HMRC have issued you with a penalty or an enquiry notice, you should contact HMRC to find out more.
What are HMRC doing?
Some taxpayers were only issued with Notices to File for 2018/19 tax returns, during June 2020, with a due date of 30 September 2020, so are now over 5 months late in meeting their obligations. HMRC plan to write to these people in March 2021 to explain the penalty and interest position, with initial and 6-month late filing/late payment penalties expected to be applied (where appropriate) in April 2021.
For taxpayers who were already in self-assessment for 2018/19, and who did not meet their obligations by 30 September 2020, interest and late filing/late payment penalties are being charged from the original due date of 31 January 2020. The initial and 6-month late filing/late payment penalties were charged in early December 2020. 12-month late filing and late payment penalties will be charged on 16 February 2021. HMRC expect penalty notices to arrive with taxpayers in week commencing 22 February (or on 17 February for those receiving digital communications via their online tax account).
You can read more about the late filing and late payment penalty regimes in our previous article ‘Your options if you missed the 30 September loan charge deadline’.
HMRC are also opening enquiries into taxpayers who filed a 2018/19 tax return, but who did not return the loan charge in that tax return. Some figures we have seen, suggest that HMRC may have opened as many as 17,000 enquiries so far.
What should I do if I’ve received a penalty in relation to the loan charge?
You can appeal late filing and payment penalties if you have a ‘reasonable excuse’ for having missed the 30 September 2020 deadline, are able to provide details and, where possible, evidence in support of those details to HMRC. A combination of reasons, rather than any one thing, may constitute a reasonable excuse to HMRC. You should also not be put off claiming reasonable excuse just because your situation does not exactly fit the examples given in any guidance or commentary.
If HMRC agree with the appeal the penalty will be removed. If they do not, it is possible to challenge HMRC’s decision as HMRC do not have the final word on whether or not an excuse is reasonable; that question is ultimately for the courts to decide. If someone is unable to agree with HMRC, they can ask HMRC to review the decision and/or appeal to the First-tier Tribunal.
If you claim a reasonable excuse, you must comply with the obligation in question without further delay, for example by submitting a late tax return as soon as possible. The law on reasonable excuse requires people to put things right within a reasonable time after the excuse has ended.
So, if as a result of reviewing your position, you now realise that you may have loan charge issues, you should take immediate steps to file your 2018/19 tax return – ideally with the correct amount of loan income in it (otherwise you may face an enquiry – see below).
Examples of reasonable excuses normally include things like:
- Problems with online filing
- Physical or mental disabilities
- Problems caused by the Coronavirus (COVID-19) situation
- It can also include where you did not understand the system and needed help from, for example, TaxAid or from HMRC. In this case, you are usually expected to have taken reasonable steps to get help with your tax affairs. Of relevance will be how difficult your tax affairs are and why, in your particular circumstances, you have found them too difficult to deal with.
- If you need help completing your 2018/19 tax return and/or making an appeal against penalties on the grounds of reasonable excuse and you are on a low income, TaxAid may be able to assist you. (Equally, if, having checked thoroughly, you are of the opinion that you did not receive any loan payments, TaxAid may be able to help you with the next steps required in this scenario).
If you are not on a low income, you should consider obtaining a tax professional’s advice and assistance, even if it means having to pay. For more information on finding a paid adviser, see our website.
What should I do if I’ve received an enquiry letter due to the loan charge?
An enquiry is the formal process by which HMRC check in detail that the information on a tax return is correct and complete.
In general, you should try and cooperate and assist the HMRC officers as much as possible during an enquiry. This will typically make it a shorter experience and if the worst happens, and some error is discovered, minimise the penalty level (penalties can be charged for filing an inaccurate tax return).
To commence an enquiry, an HMRC officer must issue a formal Enquiry Notice to the taxpayer under the relevant legislation (s.9A TMA 1970) within the time allowed. HMRC normally have a period of 12 months after the day on which a return is delivered to notify their intention to enquire into a tax return.
A tax return enquiry may be ‘full’ or ‘aspect’. In a full enquiry, HMRC broadly look at all the significant risks of error in the return. An aspect enquiry falls short of a full enquiry into the whole return, but instead concentrates on one or more aspects of it. We assume that the enquiries HMRC are issuing are aspect enquires about the loan charge. HMRC should not try to extend the scope of a tax return enquiry from one aspect to another (or even to a full enquiry) without good reason.
HMRC has the power to require information or the production of relevant documents in connection with an enquiry and penalties may be imposed for failure to do so. The information or documents must be reasonably required for the purpose of checking your tax position.
If, during the enquiry, or as a consequence of trying to gather the information or documents requested, you realise that you have loan issues and are able to arrive at an amount of loan income that should have been included in your tax return, you should let HMRC know as soon as possible. You can amend your tax return while an enquiry is in progress, although amendments to the amount of tax payable will not take effect until the enquiry is completed.
If you simply do not have the information or documents that are requested, then you should make that very clear to the HMRC officer. HMRC should then make amendments to your tax return based on the data that they hold about you.
If, as a result to the amendments, HMRC say that you owe tax for 2018/19, they should provide you with a formal explanation of the figures that they have calculated (note that their figures will include interest, which is charged automatically and possibly penalties). You should check the calculations carefully.
If, broadly, you agree with HMRC’s findings, it may help if you can make a payment on account immediately (even if an exact final figure has not yet been agreed) in order to avoid incurring any more interest on unpaid taxes.
On completion of the enquiry, HMRC will issue a closure notice. You have 30 days in which to lodge an appeal (extended by an extra 3 months if you have been affected by coronavirus).
In reality, a formal HMRC enquiry is not something most taxpayers should deal with alone, without professional advice and assistance. A good adviser, for example, can challenge any findings by HMRC that they feel are inappropriate and try and minimise any penalties HMRC are seeking to impose – something that you may not have the technical knowledge or confidence to do yourself.
But help is still available if you are unable to afford an adviser and some useful sources of information and guidance are summarised below:
- HMRC have produced a series of videos to help customers better understand the enquiry process. The videos explain what customers can expect from HMRC.
- HMRC have to act within a legal framework and officers should be polite and courteous at all times. Indeed, HMRC should adhere to your rights in the ‘Charter’ during an enquiry. These rights include ‘Treating you fairly’ and ‘Being aware of your personal situation’– so remind them if necessary.
- You might also find it helpful to read the LITRG guidance on enquiries, penalties, appeals, complaints and debt, which includes a page called ‘How to survive an enquiry by HMRC’.
- Although TaxAid can assist with certain loan charge issues, it is unable to represent taxpayers with enquiries. However, they have some excellent information on their website and may be able to arrange a telephone appointment with a specialist adviser who can give you some pointers as to how to deal with the enquiry yourself.
- HMRC have an ‘extra support’ function embedded within their enquiry team – but by its nature, this will not provide the independent advice that you may need. It does mean however, that if you need more time to reply to HMRC, for example, because you are suffering from mental or physical health problems, then this should not be problematic.
- If you have a grievance about the way in which HMRC has handled an enquiry, you can make a complaint. General guidance on making complaints can be found on GOV.UK).
- If HMRC is taking an unreasonable amount of time with an enquiry, you can apply to the tax tribunal for a direction requiring HMRC to issue a closure notice within a specified period. You can ask a Judge to decide if the enquiry should be closed at any time by completing form T245, available on GOV.UK.
Contact: Meredith McCammond (click here to Contact Us)
(First published: 15/02/21)