NEWS & VIEWS
The UK government pledged to intensify its crackdown on tax non-compliance in the 2025 Spring Statement, in the hope of raising an additional £1 billion in tax revenue by 2029/30.
The plans include recruiting 500 more HMRC compliance staff, on top of the 5,000 new staff announced in the Autumn Budget, and modernising the tax agency through digitisation. The Chancellor said the package of measures would increase the number of tax fraudsters charged by 20% each year.
Where will HMRC focus its attentions?
In the Spring Statement, the government said HMRC will target those who “undermine legitimate trade and small business” and the companies, corporations and individuals who commit fraud or “make it possible for others to hide money offshore.”
‘Phoenixism’ is also on HMRC’s hit list.
Named after the mythical bird that rose from the ashes, ‘phoenixing’ is when an individual or group winds up a company to receive its undistributed profits before carrying on the same or similar activity, often using a newly-formed company. The schemes try to receive favourable capital gains tax rates on these capital distributions, rather than income tax treatment.
The government said it would also be changing HMRC’s approach to offshore tax non‑compliance. During the next five years, the government will increase HMRC’s resource assigned to tackling “wealthy offshore non-compliance” by around 400 people and use AI to help “identify and challenge those who try to hide their wealth.”
But are there any other areas HMRC will be looking at?
Crackdown on unpaid capital gains tax
In recent years, HMRC has stepped up its efforts to track down unpaid capital gains tax, with the number of completed investigations more than tripling in the 2023/24 tax year.
The tax agency concluded 14,223 investigations into capital gains tax in the 2023/24 tax year, up sharply from just 4,564 investigations the year prior, according to figures uncovered by a Freedom of Information request.
Despite the jump in investigations, the amount of tax recovered rose by a modest 12% to £202.4 million. In the 2022/23 year, the latest for which data is available, capital gains tax receipts totalled £14.4 billion — about 2% of overall tax receipts.
Why is HMRC looking at capital gains tax?
In 2023/24, the annual tax-free allowance halved to £6,000 from £12,300. It halved again, falling to £3,000, the following year.
When the measure to reduce the annual exemption amount was announced in the 2022 Autumn Budget, HMRC estimated that an additional quarter of a million individuals and trusts would be subject to the tax for the first time by 2024/25.
It also noted that less than 100,000 of those affected would be routinely filing self-assessment returns. As a result, many of those newly in the capital gains tax net may have been ignorant of their reporting obligations, putting them firmly on HMRC’s investigative radar.
The problem with crypto
The popularity of crypto assets may have also been a factor in HMRC’s decision to ramp up investigations into unpaid capital gains tax.
Research by HMRC and Kantar UK has shown that many owners of crypto assets are not fully aware of their tax obligations, with tax non-compliance among crypto investors estimated to be as high as 55% to 95%.
Around one in ten UK adults own or have owned a crypto asset, according to a recent survey by HMRC. Capital gains tax is the principal tax likely to apply to investments in crypto assets. Despite this, over half (59%) of crypto asset owners know little or nothing about the tax.
More worryingly, only 28% of crypto investors had seen HMRC’s guidance on the tax treatment of crypto assets, and only 16% had sought tax advice in respect of their holdings.
91% of advisers are concerned about capital gains tax
In the 2024 Autumn Budget, Chancellor Rachel Reeves announced that the main rates of capital gains tax would be increasing with immediate effect.
The higher rate of CGT increased to 24% from 20%, and the lower rate rose to 18% from 10%. The rates of CGT that apply to residential property disposals remain unchanged.
HMRC acknowledged that by changing capital gains tax rates mid-way through the tax year, individuals’ levels of administration when dealing with HMRC would increase. The tax agency also said it would be too late to adjust the format of the 2024/25 tax return to accommodate the changes. This means investors will have to take extra steps to accurately report gains made on assets on or after 30 October 2024.
Against this backdrop, it is perhaps unsurprising that, in a study conducted by consultancy firm the lang cat and commissioned by Financial Software Ltd (FSL), more than 91% of advisers reported that CGT is of greater concern for them and their clients compared to two years ago.
The need for comprehensive tax support
To support their work with clients, two thirds (66%) of advisers surveyed by the lang cat said a capital gains tax calculator was “essential” and a further 19% said it was “important”. Capital gains tax functionality that includes assets’ book cost (where assets’ original cost is listed) is also considered essential by 63% and important for almost a third (30%).
Illustrating demand for comprehensive capital gains tax support, further data from the lang cat’s Analyser software showed that advisers were looking for solutions from providers.
The lang cat’s analysis showed that having a capital gains tax calculator was the top-ranking extra feature out of a total of 600 options, sitting below the vital hygiene factors of having a GIA, ISA, Flexi-Access drawdown, and access to whole of market.
Two thirds of advice firms (62%) selected capital gains tax tools when conducting their due diligence and looking for platforms to partner with.
How FSL can help platforms support their advisers
At FSL, we understand that it is almost impossible for advisers to provide the best support possible for their clients without the appropriate tools. That’s why we pride ourselves on providing the wealth industry with the most accurate and comprehensive capital gains solution for over three decades.
Our award-winning software, CGiX, simplifies the process of tax management, analysis and reporting in the UK, Ireland and the US. More than just a capital gains and losses calculator, CGiX’s unique What If tool provides insight into potential future liability analysis, tax modelling, income forecasting and model portfolio rebalancing to make tax-efficient planning easier.