HMRC Tax Software Error Risks Underreported Capital Gains

Introduction

A recent update to capital gains tax (CGT) rates in October 2024 and limitations in HM Revenue and Customs (HMRC) software could mean millions of UK taxpayers risk underreporting and underpaying tax on their 2024/25 self-assessment returns.

Financial experts are urging those filing tax returns by the 31 January deadline to take extra care, as changes to software have not kept pace with the new mid-year tax rates, potentially affecting the accurate calculation of tax due on gains realised in the latter part of the tax year.

Taxpayers urged to check self-assessment returns

With over 12 million individuals expected to complete a self-assessment tax return for the 2024/25 year, HMRC records indicate that nearly half of these returns remained outstanding at the start of January.

Many last-minute filers could be impacted by the challenge of correctly reporting capital gains, particularly following rate changes that took effect in October. Charlene Young, a senior pensions and savings expert at AJ Bell, said that, 'the festive period is now firmly in the rear-view mirror and millions of people are yet to file their self-assessment tax return for the 2024/25 tax year ahead of the 31 January deadline.

' She warned that those who rely solely on HMRC’s online system, rather than commercial tax return software or advice from accountants, face a heightened risk of inaccuracies.

Capital gains tax rates changed mid-year

On 30 October 2024, the government increased the core CGT rate for basic rate taxpayers to 18%, while higher rate taxpayers now face a rate of 24% on gains from disposals of shares and investment funds.

This represented a significant shift from the lower rates earlier in the same tax year and introduced the complication of two sets of rates applying to gains depending on the realisation date.

Taxpayers who realised gains both before and after 30 October must ensure each transaction is allocated the correct rate, a process that HMRC’s tax software is currently unable to undertake automatically. As a result, those unfamiliar with manual calculations may inadvertently understate their liability.

Software limitations may cause reporting errors

According to official guidance, HMRC’s tax software applies only the rates that were in force before October to all reported gains for the 2024/25 financial year. This means gains realised after the rate increase could be taxed incorrectly if not adjusted by the filer.

'The mid-year change means some people risk underreporting and underpaying any tax they owe for 2024/25, particularly if they rely on HMRC’s systems,' Young said. Providers of savings and investment products are required to supply an annual summary, but it remains the taxpayer’s responsibility to separate and correctly declare gains made before and after the rate change.

Official guidance and calculation tools

HMRC has responded by introducing an online capital gains tax calculator which allows taxpayers to input transaction details and determine the correct adjustment needed.

This adjustment should be manually entered on box 51 of the capital gains summary section in the self-assessment return. It is also advised that filers retain a copy of the calculator’s results page and submit it as an attachment with their return to support the calculation.

Those using third-party commercial tax software should ensure that their products have been updated for the rate changes or seek confirmation from their advisers.

Widespread implications for filers

The mid-year CGT rate change has widespread implications, particularly for non-professional and self-filing taxpayers. Failing to make the correct adjustments could result in future queries from HMRC or unexpected tax bills.

The importance of attention to detail is heightened this year, as both private investors and individuals with complex tax circumstances could be unaware of the requirement to calculate gains at separate rates.