ISA Bulletin Number 10

2 April 2009

The ISA Bulletin keeps ISA managers informed of any new developments relating to the ISA scheme. Please ensure the appropriate people in your organisation read it.

We suggest that you keep Bulletins at the front of your copy of the Guidance Notes for ISA Managers.

What this Bulletin contains

This Bulletin contains articles on:

Enquiries on this bulletin should be addressed to:

David Taylor
HM Revenue & Customs (SSO Liverpool)
Room 320

Tel 0151 472 6156

e-mail: David Taylor

New ISA Audit procedures

Beginning in April 2009, we will be changing:

  • the way we select cases for audit
  • the way the audit is conducted

In future we will carry out a range of desk-based reviews. The reviews will either analyse annual ISA information returns and claims (see paragraph 1) or be a routine check of managers’ terms and conditions etc (see paragraph 2). If queries are answered to our satisfaction there will be no visit to managers’ premises to do the more usual audit checks. If, however, there are issues that need to be resolved, we may conduct an audit visit (see paragraph 3). The desk-based reviews will be done on a rolling program throughout the year. If an audit visit is needed, the timing will be agreed with the audit manager.

1 Return/claims analysis

The analysis of the annual return will look at:

  • excess subscriptions
  • foreign addresses
  • no address reported
  • care of and PO Box addresses
  • missing National Insurance numbers (year on year comparison of %)
  • missing DoBs (year on year comparison of %)
  • number of cases reported (year on year comparison)
  • under age accounts
  • dummy National Insurance numbers

For example, if the number of cases reported has significantly increased or decreased we will ask for an explanation. This could be the result of a business merger in which case the matter may not require further investigation. If the number of cases reported without a NI number/DoB increases we might want to check that managers are not accepting applications without these details or that there is not a problem with the reporting of this information.

As part of this initial desk-based review, we will also look at interim and annual claims and the amount of flat rate charge that is paid to HMRC. We will query any significant variations.

If the analysis raises no concerns the review will end there. If there are issues we want to enquire into we will, at the same time, request sight of:

  • current ISA terms and conditions
  • a list of current ISA product specifications/stock listings (to check that investments are qualifying)
  • a copy of the current application form and whether the 'non written' procedure is in operation

If we are satisfied we will not visit the manager. If we still have concerns we will issue an audit notice and carry out an ISA audit into targeted areas (see paragraph 3).

2 Cyclical enquiry programme

Alongside the returns/claims analysis there will be a cyclical desk-based enquiry programme to check current:

  • ISA terms and conditions
  • ISA product specifications and stock listings (to check that investments are qualifying)
  • application forms and whether the 'non written' procedure is in operation

If we are satisfied we will not visit the manager. If we have concerns we may issue an audit notice and carry out an ISA audit into targeted areas.

3 Audit visits

At the audit visit we will check:

  • validity of application forms. This will not be a separate check but will be incorporated into the check of the targeted areas below
  • non UK addresses
  • excess subscriptions
  • missing NINOs or Dummy NINOs
  • care of and PO Box addresses
  • transfers in
  • breaks (gap years)
  • annual notices
  • treatment on cash on deposit
  • bed and ISA
  • share options
  • death cases
  • HMRC void letters
  • Interim and final claims
  • flat rate charge

If the audit is as a result of a cyclical check (see paragraph 2), we will also look at the quality of the information return.

Postponed ISA Audit Settlements

ISA Bulletin 1 (issued 7 April 2008) informed Managers that we were reviewing our ISA audit procedures and that settlement of on-going audits could be postponed if the Manager wished pending the commencement of the new regime. We gave an assurance that delayed settlement would not lead to a larger settlement being due as the interest clock would stop running during the interim period.

The new Audit settlement strategy has been discussed and circulated via representative bodies. The broad proposals are at Appendix A and these form the basis for our new settlement procedures. Any postponed ISA settlements are now being reconsidered using the new rules and managers with postponed audit issues will be contacted shortly. Any settlements agreed and finalised under the old rules will not be re-opened.

Unlike the revised audit approach for TDSI, where missing forms R85 can be ‘repaired’, there is no equivalent concept of ‘repair’ for ISA forms where, for example, the application form is missing. This is because there is an annual investor compliance program for ISAs, so investor breaches for past years will have been dealt with. If a form was incomplete or missing we want managers to obtain a new one rather than ‘repair’ the old one. The gap period which is not covered by a valid form will be settled on the £1 (maximum) per error basis which is outlined in Appendix A.

ISA repairable breaches (see Chapter 17 of the Guidance Notes) for simplified voiding will not be affected by this.

In future, audit settlements will go back four years (or to the date of the last audit if that is later). There will be no annual sign-off of returns which are not queried.

There will be no more PEP audits.

Appendix A

For ISA there are three types or errors that may be discovered at audit or identified by the manager before audit:

Errors that do not directly lead to a loss of tax and where the investor has not been disadvantaged

For example, administrative errors where the investor believes he has applied for a valid ISA, and where the account has otherwise been operated in accordance with the ISA rules. Technically, the administrative error will invalidate the ISA and HMRC has the power to recover the tax relief on the invalid ISAs, interest under s86, and a Schedule 24 FA 2007 penalty. However because of the unique nature of these offences HMRC will, in practice, not seek to recover the tax or interest in respect of these errors. Nor will the penalty be reduced in the normal manner. Instead:

  • it will firstly be reduced to an 'administrative error penalty' of a maximum of £1 per error - in line with the CTF penalty provisions for administrative errors. Secondly, it will be further reduced in the normal manner (reasonable care, careless, deliberate, deliberate and concealed), with further reductions for disclosure
  • where the annual information return is incorrect or incomplete, in addition to the 'administrative error penalty' HMRC will seek to recover a penalty under s98(1) in respect of the incorrect annual information return

In these cases we would expect the institution to put correct processes, procedures and documentation in place in respect of any future subscription.

Example - no declaration, National Insurance number or date of birth on application form/application not signed/missing terms and conditions but operated in practice/missing gap year applications.

Errors that do not directly lead to a loss of tax but where the investor has been disadvantaged

For example, administrative errors where the investor believes he has applied for a valid ISA, but the account has not been operated strictly in accordance with the ISA rules. For example, where the terms and conditions are defective and the provider has not complied with the transfer or withdrawal rules. Technically, the defective terms and conditions will invalidate the ISA and HMRC has the power to recover the tax relief on the invalid ISAs, interest under s86, and a Schedule 24 FA 2007 penalty.

The treatment here will be as outlined above except the further abatement for reasonable care etc will be less than that for errors that do not directly lead to a loss of tax and where the investor has not been disadvantaged.

Example - missing terms and conditions not operated in practice.

Errors that lead directly to a loss of income tax

Treatment of these errors will continue to be based on the Simplified Voiding procedures that operate now. This category will cover, for example, subscriptions in excess of the limits, the holding of non valid investments, or the failure to comply with an HMRC void notice. For these errors, HMRC will seek to recover:

  • the relevant tax (where appropriate using simplified voiding), interest and a Sch 24 FA07 penalty (equal to a maximum of the excess tax relief) reduced in the normal manner (reasonable care, careless, deliberate, deliberate and concealed), with further reductions for disclosure
  • a penalty under s98(1) in respect of the incorrect or incomplete annual information return

In these cases we would also expect the institution to carry out a 100 per cent review to correct the ISAs for the future by removing excess subscriptions and non valid investments, and complying with HMRC void notices.

Example - excess subscriptions/invalid investments/void notices not actioned

Future articles

Part of the purpose of the ISA Bulletins is to clarify areas of the Guidance Notes for ISA Managers. If you feel that any aspect of the guidance is unclear you should contact David Taylor. His telephone number is 0151 472 6156.