There has been a significant increase in the number of HMRC enquiries opened in relation to the high income child benefit charge (HICBC).
HMRC has access to a mountain of knowledge from their computer system ‘CONNECT’. This system collects information from lots of sources such as Companies House, the Land Registry, the electoral roll, Department for Work and Pensions records, banks and building societies, the DVLA and many more, including the Child Benefit Office.
This means that by simply running a search on an individual who has claimed child benefit, HMRC will often be able to see whether the claimant or their partner has earnings over £50,000, how many children they have, and whether the HICBC has been reported on the relevant taxpayer’s tax return.
It is important to note, however, that HMRC is not always right. As with any computer system, errors could be embedded in the data, so it is important to check that HMRC is correct instead of simply paying the amount demanded.
On top of the tax bill, a penalty may also be payable.
If a taxpayer has submitted tax returns any error in those returns in connection with the HICBC would be an inaccuracy in their return, meaning that penalties will fall within the behavioural regime that applies for certain tax related penalties. If HMRC opens an enquiry and it is found the taxpayer has been careless, this means a penalty of at least 15 per cent of the additional tax liability applies, although we have seen that HMRC has been happy to suspend these penalties so long as appropriate conditions are set.
If the taxpayer has not submitted tax returns, however, the error falls into the ‘failure to notify’ penalty regime. The minimum prompted non-deliberate penalty is currently 10 per cent of the unpaid tax liability for the 2017/18 tax year and 20 per cent for prior years. It is also not possible to suspend a failure to notify penalty.
There will also be interest due from the date the tax liability should have been paid, so the financial impact of a simple error can soon escalate.
Earlier this year, HMRC lost a number of HICBC cases going through the courts, resulting in refunds for many taxpayers who had been subjected to failure to notify penalties. 6,000 penalties were cancelled where taxpayers had a ‘reasonable excuse’ and, in total, £1.8m of refunds were made. In response to these failings, HMRC updated its website guidance with several factsheets, so it’s now much easier for people to find out whether they may be affected by the HICBC and what they should do about it.
These enquiries are clear evidence that ‘Big Brother’ is watching and HMRC is starting to use the information to which it has access. The message is clear: check your tax return carefully before you send it to HMRC as simple errors could be very costly.