ISA audits by HMRC (2024)

Introduction

HMRC may carry out inspections to make sure that you follow the Individual Savings Accounts (ISA) regulations. Read the information in this guide alongside the ISA managers guidance.

When we carry out the inspection, either in person or remotely, we will:

• review your procedures
• carry out sample checks on individual ISAs
• check the calculation of claims for repayment of tax and Lifetime ISA government bonuses
• check the calculation of amounts due to us
• check that rules applicable to each ISA type have been followed, such as investments being qualifying and withdrawal criteria being met
• check that subscription limits have not been exceeded

This is not an exhaustive list.

Before an inspection

Before we carry out an inspection, we will either:

• send you a formal notice of an inspection — at least 2 weeks before the date of the inspection
• contact you by telephone before we issue the notice — if you are a large business and we need a pre-inspection meeting

During an inspection

If we carry out inspections:

• remotely — we’ll contact you in advance to ask for relevant information and documents
• in person — we’ll visit the location (normally your premises) where your records are held

We will carry out inspections at the premises of a third party if:

• the administration is carried out by a third party
• the records are held by the third party

Records must be available for inspection in the UK.

What we’ll check

To check that you run the ISA scheme correctly, we will want to see:

• valid application forms
• non-UK addresses
• excess subscriptions
• missing or dummy national insurance numbers
• care of and PO Box addresses
• transfers
• breaks (gap years)
• bed and ISA
• qualifying investments
• continuing accounts of a deceased investor
• repaired and void accounts
• interim and final claims
• government bonus claims and payments (Lifetime ISA)
• evidence for charge-free withdrawals and closures of Lifetime ISA

We may need to see other records and check your systems and procedures. These include:

• applications to subscribe — including transfer applications
• correspondence
• history and valuation records
• annual claims and returns
• interim and monthly claims
• interest reports
• life insurance policies

Keeping records

Application forms, or copies, must be available for inspection for 6 years after the account is opened. You can keep digital copies of the records, such as scanned images of paper forms that we can easily access.

Follow the guidance for imaging application forms and written declarations.

You do not need to keep recordings or online files if investors apply online or by telephone.

You must be able to:

• show the date that the declaration was created
• make sure that annual returns include the information given in the declaration

If you close an account, or transfer it to another manager, you will need to keep records for 3 years after the date when the account was closed or transferred.

After the inspection

We will write to you within 28 days of the inspection to confirm if we need to take any further action.

If we believe you have given incorrect tax relief, we will ask you to pay an amount based on the incorrect relief given.

What happens to incorrect claims

Incorrect claims can attract:

• interest — charged on amounts recovered both under the strict treatment of breaches in the ISA rules, and under simplified voiding
• penalties — if the claims were made fraudulently or negligently we may charge penalties on amounts recovered both under the strict basis, and under simplified voiding

We will work out interest from 31 January following the end of the tax year.

When we believe that incomplete or inaccurate claims or returns have been made for Lifetime ISAs, we will try to recover any:

• overpaid bonuses
• underpaid charges

Breaches in the ISA rules

Some breaches of the ISA rules may only affect you. These include:

• an incorrect annual or interim claim
• incorrect action on the death of an investor

We will ask you to either:

• repay incorrectly claimed amounts
• pay amounts that you should have deducted

Some breaches of the rules may affect both you and the investor because the ISA is invalid due to the breach. These include:

• an oversubscription
• the investor is not otherwise eligible to subscribe (check who can subscribe to an ISA)

For the following breaches, we may allow an invalid ISA to continue if:

• personal information is missing from an application form — you must get the details from the investor within 30 days of the date of the audit report (the investor does not need to return any income or gains on their tax return)
• an ISA is opened in error before the end of the withdrawal period, if withdrawal rights were offered
• an ISA is in debt at any time — if the investor settles the debt within the subscription limits
• cash is not held in a designated account — if you declare the account as an ISA account

In other circ*mstances, a breach may lead to a void ISA. Some void ISAs can be repaired under the simplified voiding procedure. Others cannot be repaired and must be dealt with strictly in accordance with the rules.

Strict treatment of breaches in the ISA rules

If a breach cannot be repaired under simplified voiding, you can choose for it to be dealt with strictly in accordance with the rules.

If we find a subscription is not valid, or an investment is non-qualifying, we will ask you to:

• remove the invalid subscription or investment, and any income or gains arising from them, from the ISA (read repair and voiding and voiding and repairing policies of life insurance in ISAs)
• repay amounts claimed (and make deductions where appropriate) arising from the invalid subscription or investment (including Lifetime ISA government bonuses)

We may take a sample of ISAs. If we find that the sample includes ISAs where tax relief has been wrongly obtained but the number is not statistically significant, we will rule that it is unlikely that similar errors will exist throughout the rest of the ISAs held. We’ll 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

We will treat errors falling within irreparable breaches in this way, irrespective of the statistical significance of the number of errors found.

In other circ*mstances we:

• will check and agree with you the amounts to be paid
• may ask you to make a payment on account, while the correct figure is calculated

If the number of errors found are also statistically significant, the results of the sample will be extrapolated across the total number of ISAs you hold.

Unless the errors are limited to the personal information listed, we will ask you to:

• carry out a full review of all unexamined ISAs
• void any ISAs you identify as invalid

If an ISA is voided, you must tell each investor. They may have further tax liability and will need to report details of the interest, dividends and capital gains and losses on their Self Assessment tax return.

Working out the tax relief recovery

We will discuss the inspection findings with you and look to agree the amount of tax relief incorrectly given or claimed. We can work out the amount exactly if a full review has taken place. If we have reviewed a sample, we will extrapolate the agreed results of the sample across the rest of the ISAs you hold.

If you do not want to use extrapolation of the sample results to work out any settlement, you can review all ISAs to arrive at the correct amount.

We will:

• agree how you will carry out the review
• check the results of the review

When you review all of your ISAs, you must remove any invalid ISAs, subscriptions and investments from the scheme. We will seek a monetary settlement from you.

We will also recover relief incorrectly given for ISAs you held within the previous 4 years, but closed before the audit.

Simplified voiding

Under the strict statutory approach, breaches of the ISA regulations can lead to voiding of the ISA. If an ISA is voided:

1. We will recover from you any relief you gave to the investor.
2. The investor may have to complete a Self Assessment tax return to declare income and gains in excess of the personal savings allowance.

Simplified voiding is an alternative approach for some breaches of the ISA regulations. Under simplified voiding, we may give permission to repair certain breaches. You and the investor will need to take certain actions, so the ISA is not voided. An investor with a repaired ISA will usually remain in the same position as if the breach had not happened. The investor may not even know that their ISA breached the regulations.

We may choose not to allow simplified voiding if the breach was deliberate or careless. We will reserve it for breaches which are accidental, or which have slipped through the checking procedures despite your best efforts. We reserve the right to treat any breach strictly in accordance with the ISA regulations, and you have the same right.

Simplified voiding is voluntary. You can either:

• ask for all repairable breaches to be dealt with using the simplified voiding procedure
• insist on the strict treatment

You cannot 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. Under simplified voiding, we will proceed as follows where we find a statistically valid number of breaches as a result of our examination of a sample of accounts.

If the breaches are irreparable, or you have chosen the strict treatment, we will ask you to:

• carry out a full review of the accounts
• void any ISAs which are invalid

We will then calculate a recovery. Read the ‘calculation of a tax relief recovery’ section for more information.

If the breaches are repairable, you will not need to carry out a full review.

If you decide to carry out a full review, you must repair any breaches found. The results of the review will form the basis of the audit recovery.

If you decide not to carry out a full review, you must repair the breaches found in the sample. To calculate the audit recovery, we will normally extrapolate the agreed results of the audit sample across the rest of the ISAs you hold.

Breaches in accounts outside the sample (which have not been reviewed and repaired) may appear in the sample taken at the next audit. We will seek a recovery for tax relief incorrectly claimed or given in the ISAs that have not been repaired. This will be from the date of the previous settlement up to the date of the current audit.

Simplified voiding and insurance policies held in an ISA

When an insurance policy held in an ISA is found by you or HMRC to be in breach of the ISA rules, the breach can be repaired under simplified voiding.

You must terminate the invalid insurance policy when the breach is discovered. You can repair the breach by replacing the terminated policy with a new policy. The new policy must preserve the full value of the investor’s rights under the original policy. The proceeds from the terminated policy must be used to fund the new policy. Those proceeds will not count as a subscription to the ISA.

You need to get the consent of the investor for the repair. You may wish to update the contract for future policies to allow for an automatic replacement of a policy should repair be required.

We may seek recovery from you for any ISA with a repaired insurance policy. The settlement formula figure for the repaired insurance policy will be the same as for the stocks and shares ISA.

Breaches you can repair

No lost tax and investor not disadvantaged

This covers administrative errors where the investor believes they have applied for a valid ISA, and where the account has otherwise been operated in accordance with the ISA rules. The administrative error will invalidate the ISA and we have the power to recover:

• the tax relief on the invalid ISAs
• interest under section 86 of the Taxes Management Act 1970 (TMA 1970)

However, because of the unique nature of these offences, we will not seek to recover the tax or interest in respect of these errors and the penalty will not 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.

Where the annual information return is incorrect or incomplete, in addition to the ‘administrative error penalty’ we will seek to recover a penalty under Schedule 23 FA 2011.

In these cases, we expect you to put correct processes, procedures and documentation in place for future subscriptions.

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 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 we have the power to recover the tax relief on the invalid ISAs and interest under section 86 TMA 1970.

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, we will seek to recover:

• the relevant tax (where appropriate using simplified voiding)
• interest under section 86 TMA 1970
• a penalty under Schedule 23 FA 2011 in respect of the incorrect or incomplete annual information return

We would expect you to carry out a full review to correct the ISAs for the future by removing excess subscriptions and non-valid investments and complying with HMRC void notices.

You should contact us if you find breaches outside an HMRC audit.

Examples of breaches that are repairable and the action you and the investor can take

An ineligible investment is purchased or held in an ISA

You can only repair this breach if it is accidental.

You will need to sell the ineligible investments. The proceeds can remain within the ISA and be used to buy eligible investments. We will seek a recovery for the period the ineligible investments remained in the ISA.

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

You can only repair this breach if it is accidental.

If the investments are ineligible when the breach is found, you can sell those investments to repair the breach. The proceeds can remain within the ISA and be used to buy eligible investments.

No action is required if the investments are eligible when the breach is found, but have been ineligible at some time since purchase. We will seek a recovery 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, you should remove those investments and any related income from the ISA. We will seek a recovery 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 should remove those investments from the ISA. We will seek a recovery from the date of the incorrect allocation to the date of the audit report.

If the underlying investments are eligible, and the breach is 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. We will seek a recovery for the period the ineligible investments remained in the ISA.

Breaches you cannot repair

Breaches that cannot be included in simplified voiding, and which must be dealt with in accordance with the strict, statutory, approach are:

• incorrect annual and interim claims
• investor non-resident at the time of subscription or otherwise non-qualifying (the invalid subscriptions must be voided)
• ISA 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

Working out tax relief recovery

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

If you use simplified voiding to repair breaches, the recovery will be calculated using the settlement formula. You cannot apply simplified voiding to only some of the repairable breaches found — you must choose to apply it to all or none.

Recovery due to breaches that are included in simplified voiding will be calculated as detailed in this section.

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

• stocks and shares ISAs — the recovery will be £5 per year per £1000 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 should the yields, and the amounts invested, change markedly from our initial estimates, but the figures are not expected to change more frequently than annually. These figures will apply until we tell 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, where required, will be carried out as soon as practicably possible.

Breaches outside audit

Contact savings.compliance@hmrc.gov.uk if you discover breaches outside an HMRC audit.

1. 6 April 2024

   From April 2024, investors can subscribe to more than one ISA of the same type in the same tax year.

2. 5 April 2018

   First published.