Look out for HMRC residence corrections – which may not be correct!
By Susan Cattell, Head of Tax Technical Policy
16 December 2019
Susan Cattell discusses ongoing issues arising from HMRC’s policy on reclassifying a taxpayer’s residence and highlights the need to look out for any incorrect ‘corrections’ of 2018/19 tax returns.
Residence reclassification
ICAS reported a number of cases to HMRC for the 2017/18 tax year where HMRC had overridden the self-assessment return submitted by an agent and (incorrectly) reclassified the taxpayer as either Scottish or English. Other professional bodies reported similar experiences.
HMRC’s official policy is to determine residence status based on information held in its system. Therefore if a client has at some point given HMRC a temporary address or a ‘care of’ address, which is in the HMRC system – and that contradicts the residence status shown in the return filed by the agent, HMRC will use what is in its system (even though the agent is likely to have checked the residence status of the client).
ICAS and other professional bodies discussed this with HMRC, but the policy remains unchanged, so there are likely to be numerous residence reclassifications arising from 2018/19 returns – and we have already received reports of cases where the reclassifications are incorrect.
Correction of the return
The statutory provision which permits HMRC to override the return and reclassify the residence status of the taxpayer is s9ZB TMA 1970. This permits an officer of the Board to amend a return to correct:
- obvious errors or omissions in the return (whether errors of principle, arithmetical mistakes or otherwise), and
- anything else in the return that the officer has reason to believe is incorrect in the light of information available to the officer.
The correction is to be made by notice to the taxpayer – and can be rejected by the taxpayer giving a notice of rejection.
In examples seen by ICAS for 2017/18 HMRC was not following the guidance in its own SA Manual which states that when issuing a correction based on information held on HMRC systems, the taxpayer (and the agent if there is one) must be told what has been changed and why.
Notification of 2018/19 residence corrections
ICAS asked HMRC why corrections were not following the SA Manual guidance and early in 2019 we received the following confirmation that HMRC would change its approach:
“HMRC will be alerting the customers to any changes in the basis of the calculation of their tax (from Scottish to UK rates or vice versa). Customers can still select their status, however we will use the status HMRC holds and, where this is different, a correction and revenue calculation is completed. A paper SA302 SA tax calculation is issued to the customer and to the agent where appropriate.
HMRC will advise the customer that: ‘I have corrected your Self Assessment for your Income Tax Residency status in line with information we hold. If you have not already informed HMRC of all details of where you have lived please do that now. You can do this via your Personal Tax Account or by visiting www.gov.uk/tell-HMRC-change-of-details. You are not bound to accept the correction and can reject it within 30 days. If you do not agree go to www.gov.uk/tax-appeals and let me know the reason(s) you believe the correction is incorrect’.”
This new wording is helpful because it should alert agents and taxpayers to the fact that HMRC has changed the residence status and that the position needs to be checked. If HMRC holds out of date or incorrect information, the correction may well be incorrect and will need to be rejected.
Earlier this year it was unclear, from reports received, whether HMRC had implemented the new wording in practice, so we asked for clarification. HMRC has recently confirmed that the new wording should be appearing where residence corrections are made. We understand from a member’s report that it has been put on page 2 of the SA 302, rather than on page 1 where perhaps it might have been expected to appear.
Automated Decisions Technical Note
It is currently unclear whether proposals in a Technical Note published on 31 October could affect the format of correction notices in future. The note gave details of proposed legislation in the next Finance Bill to put beyond doubt that HMRC’s use of large-scale automated processes to give certain statutory notices, and to carry out certain functions is, and always has been, fully supported by legislation.
The technical note is discussed in more detail in another article. One of the processes which is covered by the announcement is s9ZB corrections. Once draft legislation is published ICAS will be seeking to ascertain whether the approach to correction notices will change, particularly in residence reclassification cases.
We do not believe that it assists compliance if taxpayers cannot easily see that HMRC has corrected their return, or why it has done so. Automated notices should, as a minimum, make clear that a correction has been made, why HMRC has made it and that it can be rejected if it is incorrect.
Let ICAS know what you think
Please let us know if you see any examples of HMRC corrections for 2018/19, which do not explain clearly what has been corrected - and why. This article has concentrated on residence reclassification, but we would also like to hear about any other corrections which members believe are not being adequately highlighted and explained.