HMRC recently announced that more than 12 million customers were expected to file a self-assessment tax return for 2021/22 tax year. With the 31 January 2023 deadline now behind us, many taxpayers will naturally turn their attention back to non-tax matters. However, as the deadline for the 2021/22 passes the enquiry window for 2020/21 also closes. Unfortunately, as a consequence HMRC typically issue enquiry letters to taxpayers at this time of year. Letters dated 31 January will often take up to a week to get to taxpayers and their agents, so opening the post at this time of year comes with a health warning.
Receiving an enquiry letter is never pleasant, but HMRC’s ability to enquire into a taxpayers’ affairs underpins the UK’s self-assessment tax system and is an essential part of protecting the public purse. Taxpayers that receive an enquiry letter should take immediate action to ensure that they understand precisely what HMRC has asked, the areas of risk, potential implications and ultimately the tax at stake. Sadly, this means dedicating sufficient time and resources to the matter, that will understandably be unbudgeted. Tax enquiries are costly (both in terms of time and money) and can drag out over a number of years. Whilst taxpayers will ideally have a neatly documented piece of tax advice supporting the position taken in their return, this may not always be the case. As such this is often the time taxpayers turn to specialist advisors for support.
The UK’s asset management sector is an extremely popular hunting ground for HMRC, both in terms of enquiries and litigation. A victim of its own success, the figures involved are often too compelling not to merit further investigation, which is compounded by the fact that asset managers are subject to some of the most complex and subjective areas of UK taxation. Popular areas for attention are the salaried member and mixed membership rules, two pieces of legislation that apply to LLPs introduced back in 2014. Cases involving asset management firms were the first to appear in the UK courts for both pieces of legislation. A number of asset managers received nudge letters relating to these rules back in October, potentially pre-empting an imminent enquiry.
Nudge letters have also been deployed in relation to the reporting fund status legislation for a number of years. Typically issued direct to individual UK investors, they seek to tackle common mistakes such as incorrectly taxing returns from non-reporting funds as capital gains, or the omission of excess reportable income from tax returns in the case of offshore funds with reporting fund status.
Individual taxpayers in the asset management sector also have industry specific legislation to consider in the form of the disguised investment management fee rules and the tax regime for carried interest. These are highly specialised areas of taxation, well beyond the scope of the majority of personal tax advisors. The natural desire to keep the cost of compliance low can lead to very costly mistakes with taxpayers blindsided by large and unexpected tax bills, and the associated interest and penalties.
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