A raft of ‘exceptional’ enquiries?

As a response to the onset of the coronavirus pandemic, a number of changes were made to the interpretation of what constitutes ‘exceptional circumstances’ that result in a taxpayer being treated as not spending a day in the UK for the purposes of the statutory residence test (SRT). Broadly, the SRT is a set of rules in the legislation that determine whether an individual is resident in the UK or not for the majority of UK taxes levied on them.

By way of a brief recap, certain relaxations were provided for in respect of the 2020/21 tax year to account for coronavirus related circumstances that were outside a taxpayer’s control. Broadly, these fell into two categories.

1. Days falling between 1 March 2020 and 1 June 2020 inclusive, where the taxpayer was in the UK in order to carry out specified coronavirus related work – days falling into this category were required to be disclosed in box 11.1 of the residence and remittance basis pages of the 2020/21 tax return and were limited to a maximum of 57 days for that particular year.

2. Days where the taxpayer was in quarantine, officially advised by the government not to travel from the UK, unable to leave the UK due to the closure of international borders or asked by their employer to return to the UK temporarily as a result of the virus, at any time during that tax year - days falling into this category were required to be disclosed in box 11 of the residence and remittance basis pages and were subject to the usual annual limit of 60 exceptional days.

Minutes of the October 2022 meeting of HMRC’s Wealthy External Forum note that it has identified common errors in the completion of tax returns claiming that exceptional circumstances applied, and that it has therefore taken the decision to contact taxpayers who have included such claims on their returns.

The aim of these letters is to give taxpayers notice and opportunity to correct their return as appropriate. However, the meeting minutes note that HMRC reserves the right to enquire into these tax returns where the taxpayer fails to correct their tax return and it believes an error has been identified.

Could we therefore see a raft of enquiries being opened into individuals’ returns if they have not dealt with HMRC’s previous ‘friendly’ correspondence? Assuming that their return was filed on time, taxpayers have until 31 January 2023 to file amendments to their 2020/21 return (being one year from the 31 January 2022 filing deadline).

On the other hand, HMRC has only 12 months from the date the return was filed by the taxpayer (again assuming that it was filed on time) to open an enquiry. In relation to 2020/21 tax returns, this is a date that may already have passed, meaning that the enquiry window could be closed. Should this be the case, HMRC’s only recourse would be to make a discovery assessment. For a discovery assessment to be valid, the HMRC officer cannot have been reasonably expected to be aware of the issue when the enquiry window closed. The normal time limit for discovery assessments is four years after the end of the tax period, but extended time limits apply where the loss of tax is due to careless or deliberate behaviour by the taxpayer and/or their agent.

This raises an interesting question in the context of the abovementioned letters that HMRC has sent out – if HMRC has already written to taxpayers notifying them that there may be errors on their return, is it reasonable for it to claim that it has only later discovered a potential loss of tax?

This will, of course, boil down to the nature of the letters that HMRC has sent and whether they are general educational letters or specific to the recipient taxpayer based on information in its possession that suggest an error has been made. However, should HMRC assume the stance that the letters constitute the former, affected taxpayers may potentially soon be facing both enquiries and discovery assessments. Conversely, earlier correspondence from HMRC may inadvertently provide a firm basis for taxpayers to defend themselves against the legitimacy of any HMRC discovery assessment.