Tax Indemnity Clause in Settlement Agreement

[Chunk]

You sign a settlement agreement with an employer to leave your job.

The first 30k is paid tax free. But the agreement has a tax indemnity clause stating that if the employer gets it wrong you will pay the tax and any fines associated with the tax on the 30k.

How long do you have before you no longer have to concern yourself with this?

Once the tax year is up and HMRC have looked at the employers books and found no issue with the settlement, is that the end of it?

Or can HMRC come back in 5 years time and say we missed something so now you have to pay tax?

[bd6759]

HMRC do not inspect books annually. If the employer failed to deduct tax, HMRC have 4 years to correct it, or 6 years if your employer was careless. Carelessness is unlikely if the employer took advice on the matter beforehand.

The tax indemntity clause is standard. It ensures you are not in a better position than you would be everything was done correctly

I am not a solicitor, but I doubt you could be held liable to reimburse any penalties in the unlikely event they were imposed by HMRC on the employer. Penalties could only arise if the employer acted carelessly. You are not responsbile for that behaviour.

[Chunk]

Thanks

The 4 or (6 year) limit isn't actually law is it? I mean it's just their internal policies right?

Hypothetically speaking am I correct in thinking (that technically) there's nothing to stop HMRC from coming along in 15 years time looking for tax that may not have been paid?

[bd6759]

The time limits are the law, (s34 & s36 Taxes Management Act 1970).

If you have deliberately submitted an incorrect return, the time limit is 20 years. For carelessness its 6 years, otherwise its 4 years.

[Chunk]

That's very interesting. Thank you.

[Chunk]

The legislation you refer to is very useful. I'd never heard of it before. Although I can only find a reference to a six year time limit. It appears to suggest that there is no time limit in cases of fraud or deliberate concealment. And I can't find any reference to 4 years. Am I blind?

Time limits

34Ordinary time limit of six years

(1)Subject to the following provisions of this Act, and to any other provisions of the Taxes Acts allowing a longer period in any particular class of case, an assessment to tax may be made at any time not later than six years after the end of the chargeable period to which the assessment relates.

(2)An objection to the making of any assessment on the ground that the time limit for making it has expired shall only be made on an appeal against the assessment.

35Emoluments received after year for which they are assessable

(1)Where income to which this section applies is received in a year of assessment subsequent to that for which it is assessable, assessments to income tax as respects that income may be made at any time within six years after the year of assessment in which it was received.

(2)The income to which this section applies is any income which is chargeable to tax under Schedule E, but which is not taken into account in an assessment to income tax for the year of assessment in which it is received; and for the purposes of this section—

(a)any sums which by virtue of Chapter II of Part VIII of the principal Act (expenses allowances, benefits and facilities for directors and others) fall to be treated as perquisites of a person's office or employment but which are not actually paid to that person shall be treated as having been received at the time when (the relevant expenses were incurred or are treated for the purposes of the said Chapter II as having been incurred,

(b)any payment chargeable to tax by virtue of section 187 of the principal Act (payments on retirement or loss of office or employment) shall notwithstanding anything in subsection (4) of that section (notional date of payment) be treated as having been received at the time it was actually received.

36Fraud or wilful default

Subject to section 41 below, where any form of fraud or wilful default has been committed by or on behalf of any person in connection with or in relation to tax, assessments on that person to tax may, for the purpose of making good to the Crown any loss of tax attributable to the fraud or wilful default, be made at any time.

http://www.legislation.gov.uk/ukpga/1970/9/enacted

[bd6759]

That is the legislation as enacted - that is what it said in in 1970. It has had many changes over the last 47 years

The latests changes were made by schedule 39 Finance Act 2008.

[Chunk]

Ok I understand now. Thank you very much for your help.

[Chunk]

Just one more query if you can.

Section 37(2) of the limitation act appears to suggest that there is no limitation as to how far back HMRC can go to recover tax.

Does this supersede the other legislation you refer to above, suggesting that there​ is a limit?

37 Application to the Crown and the Duke of Cornwall.

(1)Except as otherwise expressly provided in this Act, and without prejudice to section 39, this Act shall apply to proceedings by or against the Crown in like manner as it applies to proceedings between subjects.
(2)Notwithstanding subsection (1) above, this Act shall not apply to—
(a)any proceedings by the Crown for the recovery of any tax or duty or interest on any tax or duty;
(b)any forfeiture proceedings under the customs and excise Acts (within the meaning of the M1Customs and Excise Management Act 1979); or
(c)any proceedings in respect of the forfeiture of a ship.In this subsection “duty” includes any debt due to Her Majesty under section 16 of the Tithe M2Act 1936, and “ship” includes every description of vessel used in navigation not propelled by oars.