TDSI Bulletin 24 - 29 January 2008

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TDSI audit – extension of the use of ‘good evidence’

The audit section of the TDSI Guidance Notes explains that auditors will select statistically valid samples of various categories of cases (R85s, R105s etc) to check for evidence that interest has correctly been paid without deduction of tax. Where forms R85 (etc) are missing or incomplete, this is used as the basis for the audit settlement. In some circumstances auditors will accept good evidence that a missing form did exist but has been lost and auditors may not treat such an account as an error case.

From the date of this Bulletin HMRC are extending the concept of ‘good evidence’ to allow ‘repair’ of missing or incomplete forms in certain circumstances. This Bulletin also clarifies how incomplete forms will be dealt with in future. Any existing audits which have not yet reached settlement can take advantage of the new rules. The extension of ‘good evidence’ will also apply where missing or incomplete documentation comes to light in an internal review. These changes have been fully discussed with the British Bankers Association (BBA) and the Building Societies Association (BSA).

Missing forms R85

Where forms R85 are missing, HMRC will ask if there is any evidence that suggests that the form was once held – for example, a letter from the customer, or the (National Insurance Number) NINO and DoB are held on the institution’s system and the customer has no other products (eg an ISA - Individual Savings Account) where that information could have come from. If there is such evidence, HMRC will not seek a recovery for past periods, but a fresh form R85 must be obtained so that gross payment can continue. If a fresh form R85 is not obtained the institution must deduct tax from future interest payments.

In all other cases (ie where there is no evidence the form was once held), institutions can reduce the error rate by obtaining a fresh form R85 and a statement from the investor confirming when the original form R85 was lodged and that they have remained a non taxpayer since that time. (Sample wording for such a statement is shown in Appendix A)

Where a replacement cannot be obtained tax must be deducted from future interest payments, and HMRC will seek a recovery for earlier periods. Where a replacement (and statement) is obtained HMRC will not seek a recovery for past periods.

If the investor confirms that they lodged a form R85 but have since become a taxpayer, the institution must de-register the account and make future interest payments after the deduction of tax. HMRC will not seek a recovery for past periods unless there is evidence the investor told the institution that they had become a taxpayer but the account was not de-registered.

Incomplete forms R85

Forms R85 will be treated as invalid only where:

  • the form is not signed (or has been signed by the wrong person)
  • the account number is not shown on the form (unless the investor only has one account with the institution)
  • the account holder’s full name and/or address is not shown and there is insufficient information to identify the investor
  • the investor’s date of birth is omitted (unless it is held separately on the institution’s system and has been included on their annual information returns)
  • the form is undated (or completed with the wrong date), unless there is contemporaneous evidence, for example, a covering letter from the customer, indicating the date of receipt (in which case it will be treated as valid only from the date of the contemporaneous evidence of receipt)

Where any of these errors are identified, institutions can reduce the error rate by contacting the investor and obtaining:

  • a fresh form R85
  • a statement from the investor confirming they have remained a non taxpayer since the original form R85 was lodged

Where a replacement cannot be obtained institutions must deduct tax from future interest payments, and HMRC will seek an audit recovery in respect of tax that should have been deducted. Where a replacement (and statement) is obtained HMRC will not seek a recovery for past periods.

Not Ordinarily Resident accounts

HMRC will follow a similar line with Not Ordinarily Resident (NOR) accounts:

Where there is a missing or incomplete form R105 (including a non acceptable PO Box address) HMRC will follow the missing/incomplete R85 guidance above ie allow institutions to repair matters by obtaining a fresh form R105 and confirmation from the investor that they have remained NOR since the original was lodged.

In the case of missing pre 6 April 2001 deposit-taker or building society certificates, institutions can attempt to get a fresh form R105 from the customer plus a statement from them that they have remained NOR since the original R105 was lodged.

Where a replacement cannot be obtained tax must be deducted from future interest payments, and HMRC will seek a recovery for earlier periods. Where a replacement (and statement) is obtained HMRC will not seek a recovery for past periods.

Where a new party was added to a NOR account, but there is no evidence that a fresh form R105 was obtained, then the institution will need to obtain a form R105 to pay gross for the future. But this cannot be ‘backdated’ and will only apply from the date of receipt.

Other gross accounts

Where there is no evidence that the investment is not a relevant investment, fresh evidence must be obtained along with a statement that this has applied since the date interest began being paid gross. For Building Societies, this includes where a form 38(INP) is missing.

Where fresh evidence cannot be obtained tax must be deducted from future interest payments, and HMRC will seek a recovery for earlier periods. Where fresh evidence (and statement) is obtained HMRC will not seek a recovery for past periods.

Appendix A – Sample wording for investor statement

‘I confirm that

  • I completed a [form R85] [form R105] for account number ……………… and passed it to [name of institution] on [date], and
  • I have remained [a non-taxpayer] [not-ordinarily resident in the UK for tax purposes] since that date.

Signed …………………………… Date ………………….’

If the exact date is unknown, it will be sufficient to use the year in which the form was given.