Lee Sharpe reports on HMRC getting all ‘Nancy Drew’ with its sleuthing over company reporting and shareholders’ dividend income returns.
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HMRC recently undertook a ‘One to Many’ letter campaign, wherein HMRC’s skilled data analysts undertake to mine nuggets from a huge range of sources to test for omissions or errors in tax returns.
HMRC’s One to Many campaigns are typically one-to-not-so-many, targeting a relatively small percentage of the taxpaying population. But this more recent campaign is potentially much wider in scope.
The professional bodies variously reported that HMRC had started a mass-mailing campaign early in 2024 to challenge dividends that appeared to be ‘missing’ from individuals’ tax returns.
Dividend disclosures
It seems that HMRC has started to use data extracted automatically from company accounts to test against the dividends that a company’s shareholders have been reporting on their individual self-assessment tax returns.
Veteran readers will recall that small company (owner-managed business) accounts typically used to include specific disclosure on the dividends paid in the reporting period. While not this writer’s speciality, he understands that the formal disclosure requirement was repealed (in SI 2015/980), where information had previously been provided in the context of recognising dividends as part of a director’s remuneration.
Housekeeping
While the formal disclosure requirement may have been repealed, arguably, it is nevertheless good housekeeping to undertake a reconciliation exercise on reviewing the accounts, to set the known movement in distributable reserves between the balance sheet dates, as apportioned by reference to the shares each participator has held in the period, thence to derive the dividends that should have been paid out to them, and checked against the dividends included in the individual’s tax return.
While this should be relatively straightforward for the accountant, complications will include:
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company year-ends that do not happen to coincide with the tax year (or more likely, 31 March);
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likewise, dividends voted between 31 March and the end of the tax year, so on the tax return but not in the accounts that all but overlap;
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movements in the shares held by participators during the year, between dividend distributions (e.g., where a parent gifts shares to a child); or
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other share capital adjustments – buy-backs, etc., which will almost always be funded from distributable reserves (with so few alternative sources on offer, under CA 2006, ss 690–723).
Armed with the latest confirmation statement (plus updates), it is possible to deduce who owned what shares and when; it seems that this approach, or something very much like it in terms of logic, has occupied HMRC’s enquiry teams this time around.
Inferences and obstacles
HMRC’s letter template, which has been widely circulated amongst the professional press, suggests that HMRC has so far been checking inferred dividend distributions from a single company against tax return disclosures.
Complications in HMRC’s presumed approach likely include:
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Individuals with substantive holdings in more than one company (potentially including, say, a managed share portfolio).
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Where the company does not make up its accounts to 31 March (strictly, 5 April as noted above) then, without knowing the precise dates on which dividends were paid, findings cannot be conclusive.
It follows that the more complex the individual’s tax affairs, the weaker the correlation may be – particularly where the tax return shows only one figure for dividend income. But this looks set to change, thanks to yet more reporting obligations on the taxpayer.
Too much is not enough
The government’s strategy has involved a campaign on at least two fronts.
It has given Companies House significantly more power to interrogate companies on their activities, their beneficial ownership, and the details of key individuals maintained on the Register through its Economic Crime and Corporate Transparency Act 2023 – note that, while not all of this expanded information will be publicly available, the government has confirmed that the Act will give Companies House ‘more powers to share information with law enforcement agencies and other government departments from 4 March 2024’.
HMRC has also been busy expanding the scope of the data it is entitled to demand from businesses and taxpayers; since a consultation in July 2022, it has sought to increase its existing data-collection powers – potentially even beyond the then-current “functions of the Commissioners for HMRC, as contained in CRCA 2005, s 5, since [they are] not relevant to the collection and management of revenue or tax credits” – the CIOT’s words, in its response to that consultation, on 11 October 2022 (perhaps we should be grateful that HMRC appears to have calmed down a little, since).
The second of these projects is now incorporated into enabling legislation (at FA 2024, s 36) and draft regulations that from April 2025 will, amongst other things (and in current form at the time of writing), require directors of close companies to disclose in their respective self-assessment returns:
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name and registration number of each close company of which the individual is a director;
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amount of dividend income received in the tax year from each such company (including £nil); and
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the percentage of their shareholding in that company (highest in the year).
Certainly, these new obligations will reduce much of the effort (at least on HMRC’s part) and the guesswork at 1. above. It is not clear what the Administrative Burdens Advisory Board should make of these additional reporting requirements, alongside the other bits of data that HMRC intends also to collect, such as employee working hours and payment classifications under PAYE real time information reporting.
Conclusion
To the writer’s understanding, a key aim of the aforementioned SI 2015/980 was to reduce the reporting burden on smaller companies – not least by increasing the thresholds at which further such obligations were imposed. It is clearly possible that removing the formal disclosure routine could lead to less rigorous observance of a company’s internal safeguards, (or those of their adviser) and the risk that the individual’s tax returns do not accurately reflect the dividends received from their company. It also seems reasonable to assume that the government realised this in 2015 but pressed on even so.
Certainly, it is in order for HMRC to be able to trace the reduction in company reserves through to personal tax returns. As advisers will know, the legislation is heavily stacked to ensure that reductions in a company’s reserves will almost always be taxable as (dividend) income (CTA 2010 s 1000, ITTOIA 2005 s 383, etc.).
But it is, in turn, arguable that such has always been HMRC’s prerogative and has remained within their power. In other words, the removal of the reporting requirement in 2015 did not stop HMRC, even if it might make things a bit more difficult. Indeed, it was probably argued in 2015 that HMRC was (or should have been) benefiting from iXBRL-tagged and automated accounts information since around 2011. If we still clung to the notion that an HMRC officer still spends their time actively reviewing a company’s tax return, alongside the returns of its directors, we might wonder what HMRC had been doing (or not) since 2015, to lead to this apparently novel concerted effort in early 2024, and the corresponding changes to the legislative framework.
Of course, what has really changed in the last decade is the extent to which HMRC (alongside other government departments) has managed to offload its compliance function elsewhere, with the result that taxpayers are obliged to provide more information, in a format that suits HMRC, so that HMRC actually does very little detective work in the traditional sense; rather, its systems flag up an apparent discrepancy in its vast datasets, for follow-up with the taxpayer. It really has all become quite unremittingly, even robotically…elementary, Dr. Watson.
