Hi

As you may have seen in the press, HMRC has been writing to selected taxpayers to tell them their effective rate of tax is lower than average and ask them to check if it's right. The letters have been sent to so-called high net worth individuals (unfortunately I didn't get one!)

The letter says: "A person's effective rate of tax is the percentage of their income they have paid in tax. 

Looking at the figures in your self-assessment tax calculation for the year ended 5 April 2012, we can see your effective rate of tax is lower than the average for people with a similar amount of income to you. This means there could be something wrong with your self-assessment tax return." 

Recipients are then asked to check their returns for 2011/12 and contact HMRC if something is wrong. Penalties are mentioned and the letter ends up, "Paying the right amount of tax is important, as it helps to pay for the public services that we all rely on. Not paying the right amount of tax has serious consequences for these services." 

HMRC says that unless it hears from the taxpayer within one month it will assume they have checked their return and found nothing wrong. 

Unsurprisingly we are not happy, and have a number of concerns, about these letters: 

• There are plenty of reasons why the effective rate of tax may legitimately be low for a particular taxpayer for a particular year - eg reliefs have been claimed for losses, EIS investments, gift aid payments or pension contributions. The letter says nothing of this, and it would appear HMRC has not checked for such items on the tax return before writing to the taxpayer.
• Statistically 50% of taxpayers will have an effective rate lower than the average - that is why it's called an average!
• Many taxpayers will not really understand what is meant by the effective rate and may be worried unnecessarily. The letter gives no specific information about what might be wrong, so an unrepresented taxpayer will not know where to start checking.
• If the taxpayer is represented, the taxpayer is likely to turn first to the agent with the question 'Did you get my tax return wrong then?' HMRC has regularly said how essential agents are to the tax system, but this sort of letter is hardly helping us in that role.
• The letters are about tax year 2011/12, for which (for the vast majority of taxpayers) the enquiry window is now closed. HMRC could open that year if the discovery provisions applied, but they do not - HMRC apparently has no concrete information, just a risk assessment. 

In legal terms there is no obligation to reply to HMRC. In practice, if you have received such a letter, you might consider writing to HMRC to explain the reason for your effective tax rate.

This is one of a number of letters which HMRC has been using to 'nudge' potentially non-compliant taxpayers to sort things out. However, we are not happy with this imprecise and unhelpful letter, which has been sent to taxpayers we are aware of who have assumed that something is wrong. Our professional body will be taking this up with HMRC.

Noel Guilford