2019-20 self-assessment tax return submitted for a recently retired self-employed client. This was a new client and prep was complicated by the client suffering a long period of ill health/hospitalisation after they retired. HMRC sent a 'Check of your Self-Assessment letter' in January 2022 so we reviewed the client file in order to respond. We quickly discovered that an error had been made and not spotted by either us or the client before submission (essentially the net income they received from their professional practice was reported as gross income so practice costs were doubled up). We recalculated the tax and NI due, explained to the client that they would owe HMRC around £8k then wrote a long letter to HMRC explaining what had happened and about the clients health issues (with clients permission). Today we finally received a response from HMRC and I'm sitting here reading it over and over wondering what to do next because the letter simply says that following the review their conclusion is that the tax return does not need to be amended....
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Has HMRC actually received your letter or are they responding to something earlier?
I have for a friend an annoying £100 penalty for a late SA return that I can prove HMRC actually received before 31/10/21, catch is their recent letter was not responding to our February 2022 letter but our November 2021 one, effectively we are out of kilter timing letters and response as HMRC take so long to respond.
Accordingly I would check HMRC's letter that nothing needs adjusted is actually responding to your letter that something does need adjusted and not an earlier letter.
A good point - It would appear they are not responding to our letter at all, indeed what they have sent is simply a copy of the letter they have sent directly to the client. They originally wrote to the client and copied us in January 2022. We spoke to the client and told them to leave replying to us and we duly we replied by their 28th February deadline. Neither we nor the client have heard anything until the postman delivered a letter today (which starts with 'we wrote to you on the 24th January 2022 to tell you we were checking your self assessment.... etc... and our conclusion is that your tax return does not need to be amended.
You have identified an error. You have highlighted that error to HMRC. They have told you that they do not intend to amend the return based on that error.
I'd say you and your client are in the clear. You can carry on with a clear conscience.
It's not really up to us to prod HRMC and say "Are you sure you don't want this tax?". If someone on their side has made an error, then that is on them.
I understand where DJKL is coming from, but I'd argue that poor processes and service on HMRC's part do not add any obligation to us or taxpayers to double check they're not messing things up (unless of course it is in the client's favour to challenge it).
I am not sure that is the best approach, since HMRC opened a check it is, as suggested, that they have concluded that check without being aware of the letter and understatement.
Plainly and HMRC Officer who has properly considered what was sent could not conclude that there was nothing to amend.
It is of course possible that HMRC may yet raise the point.
@lone wolf you approach leaves the client wide open to discovery. I'd stick with DJKL and challenge HMRC.
I concur and would agree that HMRC is not responding to your letter but some earlier correspondence, probably that which provoked the check in the first place - difference in Employment income/pension or the like.
What you do if no further communications are received will be a bit more difficult.
I've a feeling the original letter was sent as HMRC are 'targeting' dentists in the belief they are not really self employed, though I didn't realise this back in January when we received the initial request to check the tax return I read about it later.
Id not be surprised to see a different letter in a couple of weeks.
I would be minded to advise the client not to spend the £8k just yet, and you will await further correspondence.
I would concur, they issue a lot of nonsense at times so would not be surprised if a subsequent volte face.
For example I have a second employment, for years a Scottish D0 code was issued and was roughly correct, yet for some reason on 14/4/22 they issued a SD0 wk 1/mth 1 code , I am now underpaying tax by a four figure sum, not the end of the world but there was no reason to change things as my 2020/2021 return brought out only a tiny repayment (about £50), frankly they at times do not know what they are doing .
On returning from my expedition to watch the pig squadrons giving an acrobatics aerial display (bird-watching is 'so last year' according to my neighbours), it occurred to me:
- doesn't everyone still create a unique RefNo for any written communications (at least with HMRC if not the Xmas thank you letters)?
- and do HMRC not continue to quote this (under Your Ref) on their responding correspondence?
No mention of a Your Ref and no reference to the letter or calculations we sent to them so I am beginning to suspect the computer threw out this letter in error and I expect we might receive a letter asking for money in due course. Explaining that to the client will be the interesting part.
I suspect you credit the computer with more intelligence than it possesses if you think it issued this letter "in error" ... it (like many of the humans within HMRC) has a limited number of operations and doesn't talk to others (systems or people).
So ...
* it generated a 'prod' letter and, after a period of time (during which it remained oblivious to your response), it then generated an 'all clear' letter.
* it sounds like your response has not been 'connected' to the workflow of the prod letters ... but will of course (eventually) be read and attached to your client's file for remedial action.
And the (unfortunate) moral is that it doesn't pay to respond to such prod/nudge letters ... hardly the inference that HMRC would wish us to draw!
The only consolation is that you've uncovered a true miscalculation in a previous return, so haven't really cost your client anything new ... nevertheless unfortunate given the circumstances that you indicate. In the meantime, I'd suggest he ring-fences £8k in some easily accessible deposit/savings accounts - and forgets about it until HMRC wake up.
I think that's a spot on summary Hugo - Thank You. I've let the client know to sit tight on the money for now (which was refunded to them in February 2021 from the payments on account they'd made in 2020). As with most explanations to clients these days I started with ' You have to remember HMRC is broken and has to take staff off answering phones on Fridays just to try and open post that is stacked up waiting attention from during Covid lockdowns'
I disagree, as my reply to Lone Wolf suggests. Sitting back and doing nothing opens up the avenue for HMRC for discovery, which of itself extends their deadlines. Do it now and get certainty sooner, rather than giving HMRC options that they don't need to have.
I agree (with your disagreement with my earlier post)!
Saying "forgets about it until HMRC wake up" was a sloppy conclusion to my outline of how there were two unconnected sets of communication with HMRC.
All I meant was that HMRC had already been notified of the liability ... so would presumably wake up shortly.
Waiting forever in the hope that HMRC fail to get their act together was not the intended suggestion.
I am preparing myself for the conversation with the client - it was bad enough letting them know they owed a large amount of tax, given their fragile state health wise, but to now go back and say I'm not sure what HMRC are doing but please don't accept the letter you've just had as the final word on this. Sigh!
@ Cathro (OP).
May I respectfully disagree the views expressed above, effectively recommending a “wait and see” policy.
I strongly recommend that a proactive (not reactive) approach should be taken by:-
[1] Advising the client of the underpayment (and ensuring their making prompt payment of that amount).
[2] Your sending a reminder letter to HMRC re your last letter.
(i) HMRC (from my experience) are currently taking 3/6 months to provide substantive replies to most correspondence and I would expect them to therefore reply within the next few months – however, if your original letter to HMRC has been (a) lost by Royal Mail or (more likely) (b) lost by HMRC, then HMRC might hold the client to account for failure to notify them promptly of the incorrect 2019/20 Tax Return submitted, with a consequent exposure to Penalties.
(ii) In any event, any delay in payment of the underpaid Tax/National Insurance (arising from the repayment sent to your client by HMRC) will result in an increase in Interest (such exposure may apply also to the 2020/21 payments on account).
(iii) In relation to (i) and (ii), you are exposed to risk of a claim for negligence by your client – in such regard, and in intending no offence, the errors on the 2019/20 Tax Return would normally have been apparent from a “sense check” comparison with the corresponding figures on the 2018/2019 Tax Return - I note that this was a "new client" and hence presumably you did not complete that 2018/19 Tax Return but you should in such event have obtained a copy).
You would also be possibly exposed to risk of action by your governing body for being complicit in the client’s failure to promptly rectify an incorrect Tax Return.
Purely for completeness, as you were notified (by HMRC) of the January 2022 letter, on or before 31 January 2022, your client (and/or your governing body: and/ or HMRC) may contend that you should have promptly (immediately upon receipt of the copy letter) have considered whether an amendment to the 2019/2020 Tax Return might have been necessary (as 31 January 2022 would normally have been the due date for an amended 2019/20 Tax Return).
Forgive me if anything above appears harsh, but proactive action now is the way forward – waiting for HMRC to reply to your letter (they may take several more months to reply, if at all) may just cause you further anxiety – “grasp the nettle” is the only safe approach (for both you and your client).
Basil
I would firmly agree with Basil here - if its your / your clients "errors" and you know they have under declared tax - i would not be using "innocent mistake" by hmrc as a get out clause to pay your fair dues.
Similar to situation where you calculate - tax hmrc make silly error on procesing i am presuming peeps would correct whatever error hmrc do on processing rather than simply try and pull a fast oneif the error went in their favour.
In some respects its worse here as you know return is defective and you know its your fault not hmrc's - to me in some respects the enquiry here is irrelevant to what you should be "doing"
Possibly exception being if its 100% clear hmrc are aware return is wrong and make conscious decision knowing full facts to not want you to amend return - i would guess you are nlt at that place.
Much easier not spending time trying to cheat the system when you are in practice even if there may be some tenuous excuse for doing so.
Thank you for your detailed response and to be clear I hadn't considered leaving things as they stood and waiting for HMRC to catch up, indeed the first thing I did this morning when I logged onto my PC was draft another letter to HMRC and print out copies of the original letter and all the calculations etc that I had sent to them in February, although this time I wont waste money paying for next day delivery at the post office.
With respect to resubmitting the 2019-20 return before the end of January 2022 sadly whilst the HMRC letter was dated in January 2022 by the time it had been printed, posted and delivered by Royal Mail both the client and myself only received our respective copies on the 4th February so that opportunity was not open to us, life would have been so much easier if it had been.
Whilst the error seemed to leap out at me on reviewing the file and believe me I kicked myself round the office several times for not spotting it at the time, there was a huge difference in my brain capacity in February 2022 than there had been in January 2021 (at that particular time I'm sure I'm not the only sole practitioner who was exhausted from dealing with the additional work Covid generated). The client was new to me, they were hospitalised following a breakdown for several months in the lead up to the return being filed (and I was dealing with their siblings who had power of attorney but no real idea of the clients finances), we did have a basic handover file from the outgoing accountant and I did review it in detail but the final period of trading was short and there had been changes to how the client was paid for their services v prior years, original documentation was in short supply... I could go on and on but I would still come back to blaming myself even though the client isn't.
Both the client and I just want HMRC to accept the error, let the client pay the tax/NI and hopefully all move on.
I did when we sent the detailed calculations to HMRC in February. HMRC refunded it as no tax showing as due on the account...
If its right, its a great result.
Years ago I had something similar. My predecessor at the firm had made a casting error on a spreadsheet and over-claimed about £8,000 of expenses for a client.
The client got an aspect enquiry over subsistence costs.
I responded to HMRC and pointed out the casting error and answered their questions.
The, I assume very junior, HMRC officer was fixated on a couple of restaurant bills where 5 people had attended a meal and insisted he add back 40% of as only 3 of the 5 people were a business cost.
Of course, I agreed without any fuss as the client got away with much more due to our error.....
In my view I would discuss with the client sending a letter by recorded delivery to HMRC referring to their recent letter saying that the return does not require amendment and asking them if this decision took into account your letter of such and such a date advising them of the understatement in the return and giving them 30 days to respond. If they don’t respond within the 30 days then file a formal complaint for unsatisfactory service to get it resolved one way or the other.
You have to consider that even though you had a reasonable excuse for not taking any action on receipt of the no amendment letter once you realise that your first belief was mistaken you have to correct matters within a reasonable timescale. Failure to do that could lead to HMRC considering penalties for knowingly “evading tax” as clearly you know there’s a mistake.
Additionally of course the prod letter was not the opening of a valid tax enquiry so the subsequent letter cannot be closure. These nudge letters are an abuse of the system and of course their subsequent “closure” - no amendment - are as useless and meaningless as their first. HMRC will surely argue in normal no response cases - when matters are finally settled - that the taxpayer was given 2 opportunities to disclose and didn’t take either therefore at least careless and even possibly deliberate. Your example does of course give further evidence that their system is flawed.
HMRC have a problem here as they opened an enquiry and issued a closure notice saying that no amendment was required so they can now only assess under S29 if they make a discovery. I would say that they cannot assess under discovery as the information was made available to them during the enquiry.
Section 29(6) & (7)
Information is treated as having been made available to the officer if:
it is contained in any documents, accounts or particulars supplied in connection with an enquiry into a tax return or claim, or
On what basis have you decided that OP's statement "HMRC sent a 'Check of your Self-Assessment letter' in January 2022" equates to them opening an Enquiry?
HMRC's increasing reliance on 'prod' and 'nudge' letters is a meretricious (albeit successful) way of avoiding firing the starting-pistol on a formal Enquiry ... which is of course why they do it!
