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An unrepresented taxpayer successfully claims tax concession from HM Revenue & Customs with the support of TaxationWeb and The Low Incomes Tax Reform Group

Introduction

Last month we told you about Sharon France's "Tax Credits Nightmare" and how, with the combined support of TaxationWeb and the Low Incomes Tax Reform Group, (LITRG), she fought and won a Tax Credits Dispute.

This month we are delighted to bring you the story of how another unrepresented taxpayer has successfully won an important (and, in our opinion, much under-used) concession from HM Revenue & Customs (HMRC) when they were slow to deal with an apparent underpayment of tax.

Background - When Pay As You Earn Doesn't Work as it Should

Like many others, the taxpayer, whom we shall call John from Central Scotland, was dismissed from employment at the beginning of this tax year. Fortunately for John, he now qualifies for State Pension and has a private pension with his local council. John thought that he would be entitled to a refund of tax, because he was no longer employed. This is usually the case under the Pay As You Earn (PAYE) system: the tax-free Personal Allowance is initially 'spread' across the whole of the tax year and as a result, if employment stops part-way through, then some of that Personal Allowance can go unused. It is therefore a good idea to make sure that this is claimed in full, and this is exactly what John tried to do, by writing to his local tax office.

John said,

"Back came a tax letter stating that I had underpaid tax for the past TWO years, and demanding over £2,000! I could understand this happening in one year and then being corrected by a tax code adjustment in the next year, but for TWO years? When I asked how this could have happened since my employment and private pension were both being taxed under PAYE, I was given an "unknown reason" and was told that "not all cases are checked annually". I then wrote to my tax office to complain, because I didn't think it was my fault that they'd not checked my tax position properly. But I was not hopeful of a happy ending!"

John then decided to post a query on TaxationWeb's Forum, to see if anyone else could give any advice - see Underpayment of Income Tax.

TaxationWeb Forum and LITRG Advice

Lambs, a regular contributor to the TaxationWeb Forum, gave the following advice:

"I don't of course know your precise circumstances, but I strongly recommend that you look at Small Pensions to be Taxed; But no Back Taxes on the website of our associates at the Low Incomes Tax Reform Group.

Even if this does not apply to you, there is Extra Statutory Concession A19 (ESC A19)  where HM Revenue & Customs has been slow to assess tax. This also may or may not be helpful.

This is a situation that we come across time and time again at TW (and LITRG) and I for one strongly suspect that ESC A19 is being 'overlooked' when in fact it should be considered automatically, without the taxpayer even having to ask, and is then not applied even when it should be."

John's first port of call at LITRG was Small Pensions to be Taxed; But no Back Taxes, which is a specific policy confirmed by HM Revenue & Customs, not to 'back-tax' people who'd been receiving small pensions for several years, but had not paid sufficient tax on that income. The primary reason for this being that HM Revenue & Customs simply hadn't 'linked' the taxpayers' records together, so hadn't realised that this income should have been taxed.

Recent system improvements by HM Revenue & Customs meant that these records were now being linked together and HMRC had originally been intending to demand tax for prior years from these taxpayers. After a campaign lasting several years, LITRG, Help the Aged, Citizens' Advice, Age Concern and Tax Help for Older People were successful in persuading HM Revenue & Customs to drop this approach.

Extra Statutory Concession A19

The second, broader concession (ESC A19) relates to where HM Revenue & Customs is slow to act on information it has received, and therefore fails to collect sufficient tax from a taxpayer's income. (This information could, for instance, be what's on a person's tax return, or the end-of-year tax forms sent in by his or her employer, covering salary and/or benefits in kind). Where the concession applies, HM Revenue & Customs should consider 'giving up' the tax that is technically due, because of its failure to assess the tax within a reasonable time frame. Note that 'reasonable' for HM Revenue & Customs is, broadly speaking, more than one whole tax year.

This is an important concession, because it serves to motivate HM Revenue & Customs to act on information, and to assess tax due, reasonably quickly. Tax legislation generally gives HMRC up to 6 years to make an assessment - which means that they can currently go back to ask for tax due from 6 April 2003 onwards.  (This time limit is set to change in most circumstances, down to 4 years). Nobody wants a tax bill for something that happened 6 years ago, and ESC A19 helps to make sure that this doesn't happen without a very good reason.

A Good Result

So, what happened to John from Central Scotland? Well, 3 months after his original posting on the TaxationWeb Forum, John was able to report some very good news:

"Waited a long time for the response, but worth waiting for! Received letter about 3 weeks ago now stating that this matter should have been picked up by Tax people as all information had been there for them to do so and in view of this and time limit their claim for unpaid tax was now terminated under rule ? and apologised for my worry time. Great weight off my chest. Thank you for your help."

Of course, we at TaxationWeb and LITRG are delighted for John: it seems to us only fair that HM Revenue & Customs deal with a taxpayer's information reasonably quickly, and if they don't, then it shouldn't be that taxpayer who is effectively penalised.

..But Not Always?

However, many of us in the tax profession are concerned that HMRC is becoming increasingly lax, (or, perhaps worse, reticent?) when it comes to ESC A19. It is perhaps understandable, particularly in such difficult economic times, why there is pressure on HMRC not to give up tax. At the same time, it is also understandable why many taxpayers - such as John - would find it particularly onerous to deal with an unexpected tax bill 'out of the blue', if they too are having to deal with the recession on a personal level. And in any event, HMRC's deteriorating attitude to ESC A19 started long before anyone had even heard of the 'Credit Crunch'. John Andrews, chairman of LITRG, agrees:

"We at LITRG have been trying to engage with HM Revenue & Customs over ESC A19 for the last four years, since they toughened up the criteria, but it's been slow progress, to say the least. Our colleagues at Tax Help for Older People have about 200 ESC A19 cases ongoing at the moment - that will be only a small fraction of the potential cases out there."

So, whilst we are only too pleased to congratulate John on the success of his claim for concessionary treatment, we are concerned that there will be many taxpayers out there in similar circumstances who will not be so lucky. And 'luck' should have absolutely nothing to do with tax.

A Brief Guide to Extra-Statutory Concession A19

• It is a concession, which means that it is granted at HM Revenue & Customs' discretion - they don't have to apply it.
• It may be granted if HM Revenue & Customs fail to make proper and timely use of information supplied by a taxpayer, the taxpayer's agent, the taxpayer's  employer where it affects tax codings, or the Department for Work an Pensions or a pension provider.
• It only applies to personal tax and National Insurance. It doesn't apply to companies, trusts, or tax due from employers or contractors.
• Usually, it will only be available for underpayments where HM Revenue & Customs has taken at least 12 months from the end of the tax year, to deal with a tax underpayment arising in that tax year. It follows that it will normally only apply where the underpayment arose two tax years ago.
• In exceptional circumstances - generally where there have been repeated failures to act on information so that tax arrears have built up over more than one tax year - then tax due from the previous tax year may also be given up. But never for the current tax year.
• Critically, the taxpayer must reasonably have believed that his or her tax affairs were in order (i.e., that it was reasonable for the taxpayer to believe that he or she had paid the right amount of tax). This can be a very difficult test to satisfy, and many claims fail here. The bar for Self Assessment taxpayers is set higher than for, say, PAYE taxpayers and higher still for taxpayers who have an agent.

A Final Word about Concessions

Professional advisers are of course already familiar with ESC A19, along with many other long-cherished concessions. The Wilkinson case ( R v HM Commissioners of Inland Revenue ex parte Wilkinson [2005] UKHL 30 ) has put paid to the notion of HMRC's discretion to apply concessions generally. Apparently, the Lords were unimpressed with the notion that HMRC could choose when (and when not) to apply the law. HMRC has taken steps to codify concessions. It would appear that some concessions have perhaps 'fallen out of favour'- such as C16. (See Mark McLaughlin's article Concession C16 - HMRC Not Keen?). In many respects, legislating these concessions is - in my opinon, at least - only proper. However, I suspect that I shall at some point in future have cause to rue their passing. (Even if it only means that I have to learn yet more legislation). And, I also think that the implications of Wilkinson may well extend far beyond 'mere' concessions.