Guidance

Individual Savings Accounts (ISAs) for managers: compliance reviews

Find out about what are reviews made, the records you’ll need to provide and what happens as a result.

Overview

HM Revenue and Customs (HMRC) may carry out reviews to make sure you are meeting your obligations under the ISA regulations. HMRC will:

  • review your procedures
  • check calculations
  • check the amounts due to be paid to HMRC
  • carry out sample checks on individual ISAs

Before the visit

A notice of an inspection will be issued at least 2 weeks before the visit. We may telephone you if a pre-inspection meeting is needed.

We will visit the location where your records are maintained. This is normally your own premises, or a third party premises so long as it is in the UK.

We will also want to check validity of application forms which includes:

  • non UK addresses
  • excess subscriptions
  • missing National Insurance numbers
  • care of and PO Box addresses
  • transfers in
  • breaks - gap years
  • treatment on cash on deposit
  • bed and ISA
  • share options
  • death cases
  • HMRC void letters
  • interim and final claims
  • flat rate charge for investments acquired before 1 July 2014

We may also may need to see other records and check your systems and procedures.

Any records including applications on either computer or microfilm must be accessible.

There are penalties under Schedule 23 FA 2011 for failing to make records available for inspection or for failing to provide information.

You must retain all records for 6 years, unless an account has been closed or transferred to another manager then they only need to be kept for 3 years after the date of closure or transfer.

After the visit

Within 28 days of the visit we will write to you confirming whether we are:

  • satisfied
  • not satisfied

Satisfied

No further action is needed.

Not satisfied

Where we believe that incorrect tax relief has been given by you, or an incorrect claim has been submitted, we will ask you to pay the correct amount.

Interest will be charged on amounts from the 31 January in each year of assessment covered by the audit settlement. We may also charge penalties where claims were made fraudulently or negligently.

Breaches of the ISA rules

How the ISA is treated as a result of a breach can either be under the simplified voiding procedure or repaired strictly under the rules.

Some breaches of ISA rules may affect only you or both you and the investor.

It affects only you where, for example you:

  • fail to deduct a flat rate charge for interest paid on uninvested cash (before 1 July 2014) held in stocks and shares ISAs
  • make an incorrect annual or interim claim
  • take incorrect action on the death of an investor

It affects both you and the investor, for example where:

  • there’s an oversubscription
  • more than one ISA of the same type, cash or stocks and shares, subscribed to in one tax year
  • the investor is not eligible to subscribe.

Auditors will allow and invalid ISA to continue In the following circumstances:

  • personal information absent from the application form but you obtain the missing personal details from the investor within 30 days of the date of the audit report
  • an ISA that’s opened accidently before the end of the withdrawal period
  • an ISA that’s in debt at any time, provided the investor settles the debt within the subscription limits
  • cash is not held in a designated account, provided you designate the account as an ISA account

Some void ISAs can be repaired under the simplified voiding procedure, others can’t be repaired and must be dealt with strictly in accordance with the rules.

Strict treatment of breaches in the ISA rules

If a breach can’t be repaired under simplified voiding, or if you wish, the breach will be dealt with strictly in accordance with the rules.

If we decide that a subscription isn’t valid, for example, because the investor is not eligible to make the subscription, we will ask you to:

  • remove the subscription and any income or gains arising from the invalid subscription from the ISA
  • repay amounts claimed and make deductions where appropriate arising from the invalid subscription

If we decide that an investment should not be held or purchased in the ISA, we will ask you to:

  • remove the investment and any income or gains arising from the investment from the ISA
  • repay amounts claimed and make deductions where appropriate from the holding of the invalid investment

We may use a statistically valid sample for the review. If a statistical sample contains ISAs where tax relief has been wrongly received, but the number of invalid ISAs found is not statistically valid, we will conclude that similar errors are unlikely to exist throughout the rest of the ISAs held. We will ask you to:

  • pay an amount equal to the relief given or claimed on the ISAs within the sample on which tax relief has been wrongly obtained
  • correct the individual errors identified, voiding invalid ISAs where necessary

Breaches with errors that can’t be repaired will also be treated in this way, irrespective of the statistical validity of the number of errors found.

In other circumstances we will:

  • look to settle, by agreement with you, amounts to be paid
  • ask you to make a payment on account, until the correct figure is calculated where appropriate

Where we have used a statistically valid sample, and the number of errors is also statistically significant, then the results of the sample will be estimated across the total number of ISAs held.

We may ask the you to carry out a 100% review of all unexamined ISAs that might have the same error, voiding any ISAs that are found to be invalid. Where this isn’t carried out as part of the audit, this review should take place as soon as possible after the audit is completed.

You must inform each investor whose ISA is voided to report details of the interest, dividends and capital gains and losses arising on their investment to their tax office. The investor may have further tax liability.

Calculation of tax relief recovery

We aim to agree with managers the amount of tax relief incorrectly given or claimed after discussion of the review findings. Where a 100% review has taken place, the amount can be calculated exactly. If we’ve reviewed a sample, we will normally estimate the agreed results for the rest of the ISAs held.

Where you are unwilling to rely on estimated results to quantify any settlement, you can review all ISAs to calculate the correct amount. We will agree how you will carry out the review, and check the results.

If you do review all your ISAs, you must remove invalid ISAs, subscriptions, and investments from the scheme. You will also need to pay HMRC the amount of tax relief incorrectly given or claimed.

Additionally, we’ll also recover relief incorrectly given in respect of ISAs held within the previous 4 years but closed before the audit.

Simplified voiding

Under the strict statutory approach, breaches of the ISA regulations lead in many cases, to voiding of the ISA. If an ISA is voided, auditors will recover from you any relief you give to the investor, and the investor’s tax office will recover from the investor any capital gain or higher rate tax due.

Simplified voiding is an alternative approach for some breaches of the ISA regulations. Under simplified voiding, certain breaches can be repaired, with the permission of HMRC. This means that, provided you and the investor take certain actions, the ISA won’t be made void. An investor with a repaired ISA will remain, in most cases, in the same position as if the breach had not happened. The investor may not even know that their ISA breached the regulations.

HMRC don’t intend that simplified voiding should apply to breaches of the ISA regulations that have taken place deliberately or carelessly. HMRC will reserve it for breaches which are inadvertent, or which, despite your best efforts, have slipped through the checking procedures. HMRC reserve the right to treat any breach strictly in accordance with the ISA regulations.

Simplified voiding is voluntary, and you can either ask that all repairable breaches are dealt with in accordance with the simplified voiding procedure, or you can insist on the strict treatment. You can’t use simplified voiding for some repairable breaches and not others – you must apply the procedure to all repairable breaches, or none.

The treatment of repairable breaches following audit under simplified voiding differs from the strict treatment.

If the breaches are not repairable, either because the breach itself can’t be repaired, or because you have opted for the strict treatment, we will ask you to carry out a 100% review of the accounts, voiding any ISAs found to be invalid. We will look to recover relief incorrectly given.

If the breaches are repairable, you will not be required to carry out a 100% review.

If you do decide to carry out a 100% review, you must repair any breaches found.

If you decide not to carry out a 100% review, you must repair the breaches found in the sample. HMRC will normally estimate the agreed results of the audit sample across the rest of the ISAs held to arrive at the audit recovery.

However, breaches in accounts outside the sample, which will not been reviewed and repaired may appear in the sample taken at the next audit. Where this happens, we will look to recover the tax relief incorrectly claimed or given, from the date of the previous settlement up to the date of the current audit.

An investor with a repaired ISA should not inform their office of the breach. In most cases, the investor will not be aware that you have repaired the breach. As HMRC has forgone the higher rate and Capital Gains Tax that may have been recovered from the investor, we will seek to recover an amount from you which will, on average, compensate HMRC for that tax. The recovery will also compensate for gross interest credited to the repaired ISA that you would otherwise refund to HMRC under the strict treatment.

If you choose to apply simplified voiding to repair breaches then the recovery will be calculated in accordance with the settlement formula. You can’t choose to apply simplified voiding to only some of the repairable breaches found - you must choose to apply it to all or none.

The figures to be used in the formula settlement are as follows for:

  • stocks and shares ISAs the recovery will be £5 per year per £1,000 subscribed
  • cash ISAs the recovery will be £10 per year per £1,000 subscribed

The figures used in the settlement formula are based on estimates of the average yield for each type of ISA, and of the amounts invested by higher rate, basic rate, and non-taxpayers. The figures will be revised if the yields, and the amounts invested, change markedly from our initial estimates, but the figures are not expected to change more frequently than annually. The figures above will apply until HMRC notify you otherwise.

Recovery from a stocks and shares ISA is based on the amounts subscribed to the ISA, not the value of the investments held.

The settlement will be calculated up to the date of the audit report on the understanding that any repairs will be carried out as soon as possible.

Types of repairable breaches

No lost tax and investor not disadvantaged

For example, administrative errors where the investor believes he has applied for a valid ISA, and where the account has otherwise been operated within 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 won’t 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 be reduced to an ‘administrative error penalty’ of a maximum of £1 per error - in line with the Child Trust Fund penalty provisions for administrative errors
  • 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 recover a penalty under Schedule 23 FA 2011 in respect of the incorrect annual information return

In these cases we would expect you to put correct processes, procedures and documentation in place in respect of any future subscription, examples of this type of breach include:

  • missing declaration on application
  • missing National Insurance number
  • date of birth missing from application form
  • application not signed
  • missing terms and conditions but operated in practice
  • missing gap year applications

No loss of tax but investor disadvantaged

This could include administrative errors where the investor believes they have applied for a valid ISA, but the account has not been operated 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 will be as outlined above, unless 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.

Breaches leading to a loss of tax - simplified voiding

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-qualifying 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 Schedule 23 FA 2011 in respect of the incorrect or incomplete annual information return

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

You will often discover breaches outside an HMRC audit, for example, following an internal audit. If a breach is discovered, you should contact us.

Examples of breaches that are repairable, and details the action you and investor can take to repair the breach

An ineligible investment is purchased, or held, in an ISA

This breach can only be repaired if it is unintentional. You can repair the breach by selling the ineligible investments. The proceeds can remain within the ISA and used to buy eligible investments. HMRC will look to recover the relevant tax for the period the ineligible investments remained in the ISA.

An investment that was eligible for an ISA on purchase later becomes ineligible

This breach can only be repaired if it is unintentional. If the investments are ineligible at the time the breach is found, then you can sell those investments to repair the breach. The proceeds can remain within the ISA and used to buy eligible investments. If the investments are eligible at the time the breach is found, but have been ineligible at some time since purchase, then no action is required to repair the breach. HMRC will look to recover the relevant tax for the period that the investments were ineligible.

Subscription limits breached

You can repair this breach by removing the excess subscription from the ISA. If the excess has been used to purchase investments then you can repair the breach by removing those investments and any related income from the ISA. HMRC will look to recover any relevant tax from the date the subscription exceeded the limit to the date of the audit report.

Incorrect allocation of dividends to an ISA

You can repair this breach by removing the dividend from the ISA. If the dividend has been used to purchase investments, you can repair the breach by removing those investments from the ISA. HMRC will look to recover any relevant tax from the date of the incorrect allocation to the date of the audit report.

Incorrect transfer of shares from a Schedule 3 SAYE option scheme, approved profit-sharing schemes, or Schedule 2 Share Incentive Plans

If the underlying investments are eligible, and the breach concerns a failure in the transfer procedure, you can repair the breach by correcting the error. If the underlying investments are ineligible, you can repair the breach by selling those investments. The proceeds can remain within the ISA and used to buy eligible investments. HMRC will look to recover any relevant tax for the period the ineligible investments remained in the ISA.

Irreparable breaches

Irreparable breaches that can’t be included in simplified voiding must be dealt with in accordance with the strict statutory approach include:

  • incorrect manager annual and interim claims
  • you fail to deduct flat rate charge from interest paid on cash held in stocks and shares ISAs - applies for periods before 1 July 2014
  • investor is non-resident at the time of subscription or otherwise non-qualifying - the invalid subscriptions must be voided
  • subscriptions by an investor to 2 or more ISAs of the same type (cash or stocks and shares) in the same tax year and the subscription limits have been breached - the second and later ISAs should be voided
  • ISAs opened before the end of the tax year when the subscription is made after the end of the tax year - the ISA must be voided
  • incorrect action on the death of an investor

HMRC Statement of Practice

HMRC Statement of Practice SP8/91 explains the circumstances when we will recover tax where a claim or an assessment has previously been settled by agreement. Agreements won’t be changed unless the information on which that agreement was based was misleading. We don’t look to recover claims that are made before the end of the period covered by the last inspection, even if the earlier inspection resulted in any recovery, unless the settlement was based on:

  • misleading or incorrect information provided by you
  • computational errors which you could not reasonably believe were correct or intended
  • errors arose that were not readily susceptible to inspection checks

The protection afforded by the Statement of Practice doesn’t extend to claims made after the end of the period covered by the last inspection.

Published 6 April 2016