HMRC Targets Excessive BADR Claims

HMRC’s latest anti-avoidance campaign involves investigating taxpayers who have exceeded their BADR limit. The tax authority is sending out letters to anyone who has surpassed the £1 million Business Asset Disposal Relief (BADR) limit.

Why Is HMRC Cracking Down on BADR Claims?

BADR, previously known as entrepreneur’s relief, helps to reduce the Capital Gains Tax (CGT) rate on qualifying business asset disposals. Initially, the lifetime BADR limit that business owners could claim was £10 million. But it was reduced to £1 million on 11 March 2020. This meant that anyone who had claimed BADR above the £1 million limit had to pay full tax on any capital gains.

HMRC identified cases where taxpayers exceeded the limit in their 2022/23 tax returns. So, HMRC sent letters to notify them to amend their tax returns within 30 days to avoid penalties. The letters read, “Our records show that you’ve exceeded the lifetime limit of £1m prior to submitting your latest Self Assessment Tax Return. This means your claim is likely to be accepted, and you’ll need to pay tax on the capital gain at the normal Capital Gains Tax Rates.”

What Should Taxpayers Do if They Receive an HMRC Letter?

Anyone who has received the letters must amend or remove BADR claims from their 2022/23 tax returns. Failure to comply can lead to additional interest on unpaid taxes and even penalties. HMRC can correct the returns under Section 9ZB of the Taxes Management Act, 1970.  In addition, non-compliance can also trigger a compliance check on the taxpayer’s returns.

A partner at the Financial Conduct Authority (FCA) has advised taxpayers to review their BADR claims and consider capital losses to stay within the £1 million limit. He also added that HMRC is not taking capital losses into account by saying, “When I engaged with HMRC, I was told that the information on the £1m limit was captured from the tax returns with no focus on capital losses that may have reduced the capital gain and left the £1m intact.”

Conclusion

Taxpayers should discuss these letters with their accountants to ensure compliance and avoid penalties. HMRC has set up a dedicated phone line (0300 057 9222) and email (responseteam3@hmrc.gov.uk) for enquiries. You can enquire about BADR letters through telephone from Monday to Friday between 9 am and 5 pm. It advised not to delay the process as further interest and penalties may be added to the taxes.