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In the wake of the 2022/23 tax return season, HMRC's Wealthy Team has initiated a new wave of One to Many Letters targeting taxpayers who have claimed Investors’ Relief. These checks are aimed at ensuring that taxpayers who claimed the relief are indeed eligible and have provided sufficient information to support their claims.
Investors’ Relief was introduced in 2016 to encourage investment in unlisted companies by offering a lower Capital Gains Tax rate of 10% on qualifying gains. The relief, however, only applies to shares held for at least three years, meaning that the first claims were made in the 2019/2020 tax year. As the relief matures, HMRC is increasingly scrutinising claims to ensure compliance with the rules.
The Two Versions of HMRC’s Investors’ Relief Compliance Check Letters
There are two distinct versions of the Investors’ Relief letters being issued by HMRC. The content of each letter depends on the nature of HMRC’s concerns:
Insufficient Information Provided:
The first version of the letter is sent to taxpayers where HMRC believes that the information provided in the tax return is insufficient to support the claim for Investors’ Relief. This letter is essentially a prompt, inviting recipients to either amend their tax returns with additional details or provide further documentation within 30 days. Failure to respond adequately could lead to an HMRC compliance check, which may result in penalties if errors or omissions are uncovered.
Ineligibility Based on Provided Information:
The second version is sent to taxpayers where HMRC believes that the individual does not meet the qualifying conditions for Investors’ Relief. This could be due to the nature of the investment, the holding period, or other qualifying criteria. Taxpayers receiving this letter are also given a 30-day window to amend their tax returns. If they fail to do so, they risk a compliance check and potential penalties if HMRC confirms that the relief was claimed in error.
The Compliance Challenge: Why Now?
The timing of these compliance checks is not coincidental. The three-year qualifying holding period for relevant investments means that HMRC is now seeing a wave of claims for the first time. However, the lack of distinct statistics on Investors’ Relief claims complicates the picture. To date, HMRC has not been able to separate claims for Investors' Relief from those for Business Asset Disposal Relief (BADR), making it difficult to assess the true scale of Investors Relief claims and potential non-compliance.
HMRC’s scrutiny is driven in part by the relatively small impact of Investors’ Relief on the Exchequer compared to other reliefs like BADR. Originally estimated to cost £60 million, HMRC has acknowledged that a small proportion of the tax saved under BADR is related to Investors Relief. This has led some to question the viability and attractiveness of Investors’ Relief, especially given the availability of other, potentially more beneficial reliefs like the Seed Enterprise Investment Scheme (SEIS) or the Enterprise Investment Scheme (EIS), which offer provisions for losses.
What Should Taxpayers Do?
If you receive one of these Investors’ Relief claim letters, it's crucial to take immediate and informed action:
Review Your Claim: Begin by thoroughly reviewing the details of your Investors’ Relief claim to ensure it meets all the qualifying criteria. This includes verifying the three-year holding period, the nature of the shares, and the specifics of the investment. Make sure that all conditions for the relief are satisfied.
Respond Promptly: If the letter indicates that insufficient information has been provided, promptly gather the necessary documentation and submit it to HMRC within the 30-day deadline. For those who receive a letter suggesting ineligibility, consider your options carefully. Amending your return or providing additional evidence may be necessary, but it's important to get it right.
Seek Specialist Advice: Given the complexities of tax law and the specific qualifying conditions for Investors’ Relief, it's wise to seek professional advice. Tax Dispute Experts specialise in HMRC compliance checks and can help you navigate this process with confidence.
Our team of experienced tax professionals can assist you in reviewing your claim, responding to HMRC’s letters, and mitigating the risk of penalties. With our expertise, you can ensure that your Investors’ Relief claim is robust and compliant, giving you peace of mind in dealing with HMRC.
Ignoring the letter or failing to respond adequately could lead to an enquiry by HMRC, potentially resulting in significant penalties. Therefore, addressing the issue promptly and correctly is essential.
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