Paying the right amount of tax – the correct amount due under the law - is a principle which has underpinned my entire career in taxes. However, a report published today by the National Audit Office (NAO) contains the unprecedented recommendation that HMRC should now 'do more to identify the most effective approaches to maximising the tax revenue paid by the wealthiest people in the UK'. That’s a massive change of emphasis and one which will usher in a far more combative phase in the relationship between wealthy individuals, their advisers and HMRC.
High net worth individuals often have complex tax affairs. They may also have more choice over how they manage their income and assets than the average taxpayer. It can be challenging for HMRC to understand the tax affairs of these individuals and to work out the correct amount of tax they should pay.
In 2009, HMRC established a specialist tax unit to manage the tax affairs of high net worth individuals, to give it a better understanding of the overall tax position of these individuals and their behaviour. In April 2015, this specialist unit dealt with the tax affairs of around 6,500 high net worth individuals. That’s roughly 0.02 per cent of all taxpayers. A tiny proportion of the total, but these individuals paid more than £4.3 billion in tax.
A report published by the National Audit Office on 1 November 2016 shows that, in the course of its work, this unit within HMRC is currently running a formal enquiry on around one third of all high net worth taxpayers. In 2015/16, HMRC recorded a yield of £416m from the work of the high net worth unit.
Clearly, it’s important that everybody pays the right amount of tax. Against that background, we can understand the need for the high net worth unit. Formal enquiries are to be expected as HMRC tries to understand what is going on, and challenges what it thinks is not permitted by law. Extra tax bills and interest, perhaps penalties too, may follow. We also understand that the risk assessment process, which is commented on by the NAO in its report, will also lead to enquiries into the tax affairs of individuals who have nothing more to declare. That’s part and parcel of a risk-based system whose aim is to ensure that everybody pays the right amount of tax.
What is new is the recommendation that HMRC should work harder not merely to ensure that more people pay the right amount of tax, but that tax revenues from the wealthiest people are maximised. That’s tax farming by any other name. It’s not permitted by statute or regulation. It’s not approved of by HMRC’s manuals. It’s not discussed in any HMRC practice note. So it’s a mystery to us why the NAO, respected for its objective analysis and in the context of an otherwise balanced and very informative report, should urge this change of approach.
In subsequent editions of RSM’s weekly tax brief, we will be looking at 'penalty farming' by HMRC, a practice which is already causing us concern. If taxpayers now have to cope with 'tax farming' by HMRC, then we are all in a completely new ballgame.
If you would like any further information on the points raised, please get in touch with George Bull or your usual RSM contact.