Doctors targeted in HMRC tax campaign

Author: Markel UK

As HMRC seeks to maximise tax revenue, there appears to be a new focus on doctors’ expenses. We’ve seen so-called ‘nudge’ letters that have been sent to doctors questioning whether they are really entitled to refunds claimed on their tax returns.

These one-to-many letters have been used by HMRC for several years to target specific groups and to encourage them to correct any errors and pay all tax that is due. Thousands are sent out and they don’t necessarily mean that an official investigation is about to be launched, but they shouldn’t be ignored.     

Recent letters we’ve seen mention doctors’ tax returns, saying they include “substantial employment expenses which do not appear to be in line with the nature of your employment and, as a result, the repayment has not been issued.” The letters finish with a warning that if there is no response within 30 days, HMRC will consider opening a formal compliance check.

What you can claim      

Doctors often claim expenses for things like travel from one hospital to another, hotel and subsistence fees, and professional fees for activities such as training. However, there is a danger that they might mistakenly claim for items like clothing, which are not tax deductible, or claim travel costs in error.      

Former tax inspector James Cordiner, who is now our Tax Investigations Manager, says: “In the right circumstances, you can claim expenses whether you are a doctor or anyone else. But for those expenses to be tax deductible they need to be wholly, exclusively, and necessarily incurred for the purposes of employment.     

“And the question is that if those expenses are wholly, exclusively and necessarily required and need to be incurred for you to do your job, why isn’t your employer reimbursing you? Why isn’t it the case that you pay the cost but then claim it back from your employer, so that you are not out of pocket?”    

That said, it is acknowledged that some employers may pay mileage rates less than the HMRC allowable rate, in which case the difference can be claimed back from HMRC.

Take letters seriously

While insurance policies don’t usually cover responding to nudge letters because no formal inquiry is underway, our tax experts are able to provide advice and support to individuals or their accountants. We keep a close watch on HMRC’s use of nudge letters, such as its earlier focus on areas like partnership income, offshore income, offshore gains, foreign tax credit relief, and crypto assets.   

Cordiner says: “Our approach to nudge letters and the advice we would give to anyone who has received one is to take it seriously. Review the content of the letter. What is the specific area that HMRC is asking about? Consider your tax position in relation to that area. Is there an issue?    

“If there’s an issue, it needs to be addressed, and you should seek advice. Even if there isn’t an issue and you don’t consider there is any tax being lost to HMRC, we would always recommend that you respond to them in some way. One way is to go back to HMRC and say ‘I’ve got your letter. I have reviewed my tax position and as far as I’m concerned, my taxes are all up to date and I don’t have anything to disclose.’”    

There are three other ways to respond to nudge letters that many people consider. The first way is to do nothing, but that will mean you are unlikely to get your tax refund and could face a more formal compliance check. The second option would be to push back and say that on the basis that the nudge letter is not a formal inquiry, could they please release the refund. Another option would be to say that you are happy to answer HMRC questions but would prefer to do that on a formal, rather than an informal, basis.

Increasing tax focus    

We expect to see a continuing focus on tax compliance as HMRC recruits 5,000 new compliance officers promised by the government over the next five years. Around 10% of them are already in place, although they will need training.     

Cordiner says: “I think HMRC’s current business model is built around three key areas and nudge letters is one of them. It has been a good source of revenue for HMRC for a number of years, and it is cost-effective. Then there is the routine work such as enquiries into sole traders, partnerships, companies, and so on. I expect they will do more of that in the coming years. And then there’s a focus on particular areas, such as tax avoidance schemes.”     

Markel can provide consultancy to accountants around how to respond to nudge letters and support on a wide range of complex tax issues.