New powers on the horizon for HMRC

HMRC has been reviewing its tax administration framework (the laws, regulations, processes and guidance with which it administers the UK tax system) since 2020 and, as part of this review, has sought feedback on ways to simplify and improve its processes. 

Proposed changes to HMRC compliance powers

The latest consultation document, published in October 2024, requested feedback on proposals to help HMRC tackle non-compliance, through:

• changes to HMRC’s existing powers and processes; and
• a new power to require taxpayers to correct mistakes themselves. 

Changes to existing HMRC powers

One option under consideration is to extend the requirement for claims in tax returns to be supported by additional information forms (AIFs). AIFs are already required for research and development (R&D) tax relief claims, but have been controversial due to the detailed information requirements and the consequent additional time and costs involved for taxpayers and their agents making claims. Whilst expanding this power to further types of claims could reduce non-compliance, there are areas for improvement in the current R&D AIF. Consequently, we believe HMRC should prioritise these improvements before any extension of this approach, which would add to the administrative burden for taxpayers. 

Another proposal is to reform the current Revenue Correction Notice (RCN) conditions. This power enables HMRC to correct income tax and corporation tax returns when there is an obvious error or other reason to believe the return is incorrect, but is limited to obvious errors and omissions for stamp duty land tax returns. The taxpayer’s ability to reject RCNs also varies across taxes. HMRC proposes a simplification to align the conditions across the relevant taxes. However, RCNs have been incorrectly issued by HMRC officers in the past in attempts to circumvent the enquiry process. A recent example involved an RCN being issued to remove an R&D tax relief claim, which, in the absence of any enquiry questions or evidence, HMRC perceived to be invalid. This wholly inappropriate use of an RCN was swiftly withdrawn when challenged. However, we believe that if this power is to be aligned or extended, it is imperative that suitable safeguards in relation to its use are also implemented. 

Taxpayer requirement to self-correct

Over the past few years HMRC has increased its use of ‘one-to-many’ (nudge letter) campaigns, asking taxpayers to voluntarily verify that their tax returns correctly reflect ‘information’ held by HMRC, or else rectify the position by disclosing historical inaccuracies.

HMRC now proposes to legislate this approach to enable it to issue self-correction notices, giving taxpayers a legal obligation to respond by correcting returns and/or claims, or to state why the notice is incorrect. A failure to comply could attract penalties and/or enquiries into the taxpayer’s affairs. 

The one-to-many campaigns have helped HMRC increase tax revenues by requesting taxpayers self-assess historic inaccuracies, but the proposed new requirement to self-correct clearly suggests HMRC feels that there should be more of an obligation for taxpayers to bring their affairs up to date. Whilst we agree that it is important for taxpayers to actively engage with their tax affairs and properly deal with this type of HMRC correspondence, introducing a legal obligation for taxpayers to comply would add further stress and potential additional cost for taxpayers, so this proposal needs to be considered carefully before any legislation is introduced.

Next steps for HMRC’s tax administration framework proposals

Once respondent feedback is collated and reviewed, a government response will be published and, subject to the conclusions drawn from the views expressed, the proposed changes will be rejected or taken forward, with the possibility of further consultation on detailed design issues. It is not clear at this stage, therefore, how likely the suggested changes are to be implemented and, if so, when. Nevertheless, we hope that the suggestions for improvements and other feedback RSM and other respondents have contributed are considered carefully by HMRC, to ensure taxpayers are not left with unnecessary and/or unreasonable additional compliance burdens and costs. 

For more information, please get in touch with Paul Marcroft or your usual RSM contact.