PAYE Investigations Impact on Tax Retuen

[tom 7000]

Background - Self employed person with 40+ staff

In 09/10 the paye inspector has visited and assessed circa 180k ( + interest etc) additional paye for 06/04/01> 05/04/06
Half was paid in 09/10 and the other half will be paid 10/11

The previous accountants didnt accrue for these liabilities in the prior accounts as they didnt know about them.

I am doing 09/10 tax return now...so

a) Do I put in 90k - what was paid
b) Do I put in 180k - the total assessed
c) Do I put in zero and open up the earlier years and amend these.

Its only easy if you know the answer...

Thanks

Tom

[wamstax]

Goodness Tom
Such a sizeable tax bill and just paid willingly?

The answer is that you can accrue the liability at the stage that the debt is clearly established and this would normally be for the latest year that is open. Clearly there would be no opportunity to reopen earlier years under error or mistake relief provisions as the accounts were "correct" when submitted and do not incorporate any error as the debt was presumably established after the return was submitted.If the PAYE was assessed in conjunction with an enquiry into your client's self employment then inevitably this would normally be the latest year that would be open and capable of being adjusted to take the PAYE debt into account against profits. Of course if this meant that there was a loss to carry back that would involve the usual practice of working out the tax repayable for earlier years and adjusting against the enquiry year.

Of course if the PAYE liability was not established in conjunction with any enquiry then I would look to incorporate the PAYE debt (but not any penalty) in the first year that can still be amended.

I hope that this helps but if not please get back for clarification

[wamstax]

Hi there by way of further explanation - and HMRC's view on matters - please use the following link

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47090.htm

I note that the instruction says that any claims to reopen earlier years on the basis of error or mistake provisions should be submitted to the HMRC Technical advisor but I venture to say that such a claim would not be entertained -unless of course by claiming error or mistake relief you would effectively stop the trader from going back to the earliest period if it was now out of time. For that reason I would not be contemplating making an eror or mistake claim and merely amend the latest period that is still in time for determination (at end of an open enquiry) or by amendment of the return

[Loza]

You should not reflect these underpayments in the 09/10 return.
The outstanding liabilities and interest and penalties arising will be calculated by HMRC and set out in a formal settlement letter which your client will have to sign in order to achieve closure.
Any payments made so far will be taken account of in that settlement.

[wamstax]

Sorry Loza,
You have I think misunderstood exactly what has happened and what Tom is asking. Tom wants to know in what period he can claim the tax deduction to reduce the taxable profits

[Loza]

My understanding is that PAYE liabilities have arisen on returns up until 2005/06.
The PAYE/NI itself will be collected through a regulation 80 determination.
The tax returns themselves are incorrect and need to be put right.
This cannot be done by making an adjustment in 2009/10, this would make that return incorrect as well.
The answer is C, the liability on the prior returns needs to be re calculated and agreed with HMRC

[wamstax]

Loza
try reading the following link which will confirm that HMRC will only allow you to adjust the relief for the PAYE etc in the latest year that can be amended (if any of the earlier years were not under enquiry.
regards
bill@wamstaxltd.com

[wamstax]

http://www.hmrc.gov.uk/manuals/bimmanual/BIM47090.htm

[Loza]

Wamstax
Thank you for your post, I stand corrected (I think)
Clearly the guidance supports your view, however the materiality of these amounts makes me believe that applying that guidance could lead to nonsensical results if losses were created in the current year and then carried back to taxable profits in earlier years.
I would still feel formal disclosure to be the proper and best approach, ie let HMRC decide how the matter is concluded.

[mullet]

The answer is C, the liability on the prior returns needs to be re calculated and agreed with HMRC

The OP actually said "c) Do I put in zero and open up the earlier years and amend these."

The earlier years' returns cannot be amended - they became final at the 1 year anniversary of the statutory filing date (i.e. 12 months following 31 January following the end of the respective tax year). HMRC cannot do "discovery" assessments as the discovery has to be an underpayment of tax rather than an overpayment.

The only way of dealing with this would be what was Section 33 TMA 1970, error or mistake relief (now called overpayment relief). The time limit is 4 years from the end of the relevant tax year, so the earliest years would be time-barred anyway.

HMRC's approach is to allow the deduction for the PAYE liability (not the interest or penalty) in the year in which settlement occurs. It has always been that way. It is easier to deal with administratively, and also means that the full deduction can be given (where it might be time-barred as above). OK, the tax rate in the year of settlement might not be the same as the relevant year(s), but that's how it's done.