.png)
.png)
21 February 2001
Replies to Queries – 2
Corporal punishment
The last year for which my client received a tax return was 1991 and at that time the Inland Revenue was aware that he had employment as well as an army pension. Subsequently he has received code numbers but no tax returns from the Revenue.
The Revenue has now discovered that he should have paid tax at 40 per cent for all years from 1994-95 and has made assessments through to 1999-2000. The total tax underpaid is £8,000.
Corporal punishment
The last year for which my client received a tax return was 1991 and at that time the Inland Revenue was aware that he had employment as well as an army pension. Subsequently he has received code numbers but no tax returns from the Revenue.
The Revenue has now discovered that he should have paid tax at 40 per cent for all years from 1994-95 and has made assessments through to 1999-2000. The total tax underpaid is £8,000.
Replies to Queries – 2
Corporal punishment
The last year for which my client received a tax return was 1991 and at that time the Inland Revenue was aware that he had employment as well as an army pension. Subsequently he has received code numbers but no tax returns from the Revenue.
The Revenue has now discovered that he should have paid tax at 40 per cent for all years from 1994-95 and has made assessments through to 1999-2000. The total tax underpaid is £8,000.
As my client could have reasonably assumed that his code number was correct and that his income tax affairs were in order, could Extra-statutory Concession A19 be used against the arrears either wholly or in relation to earlier years only, i.e. pre self-assessment years?
Alternatively, do readers have any other suggestions?
(Query T15,757) – Quills.
It is assumed, in answering this query, that:
* the income which caused the taxpayer to move into the higher rate band was solely from the two sources mentioned – i.e. there was no savings income or other taxable amounts; and
* there was no obvious reason why the full amount of income was not taken into account for pay-as-you-earn coding purposes – such as a car benefit left off the P11D.
Clearly the case will be wholly different if either of these do apply, but if they do not then there are two possible approaches. Under section 7, Taxes Management Act 1970 there is no requirement to notify chargeability if income from a source 'has been or will be' taxed through pay-as-you-earn. In this case the taxpayer believed his two PAYE sources had been fully taken into account, when in fact they had not. He should be able to claim reasonable excuse under section 118, Taxes Management Act 1970 on the grounds that all relevant information had been provided to the Revenue and he thus did not consider he had any obligation further to notify chargeability (see Statement of Practice SP1/96).
Extra-statutory Concession A19 provides another avenue. It applies where the Inland Revenue fails 'to make proper and timely use of information supplied' if the taxpayer 'could reasonably have believed that his or her tax affairs were in order'.
When judging 'reasonable belief', the Revenue will take into account the size and nature of the error (see its Assessment Procedures Manual at paragraph AP4700). In this case the size of the error would need to be considered on an annual basis – it may have been relatively small in the earlier years, for example. The nature of the error – a belief that the Revenue coding notices would take both of the income sources into account – may fall within the concession, although it is not included in the list of examples given at paragraph AP4720.
The other factor considered by the Revenue in applying the concession is how well the taxpayer is able to understand his affairs (see paragraph AP4700). The concession is unlikely to apply if the taxpayer used an agent, see for example Pleasants v Atkinson [1987] STC 728. But in other circumstances the manual takes a tolerant approach, saying that:
'There is no statutory right of appeal against our refusal to grant Extra-statutory Concession A19 relief because it is an extra-statutory concession, not a remedy provided by the Taxes Acts. You should therefore give the taxpayer the benefit of any doubt.'
To answer the final point, these arguments will apply in much the same way both before and after the introduction of self assessment, even though the wording of section 7, Taxes Management Act 1970 altered with effect from the year 1995-96. – Maeve.
It is assumed that 'Quills's' reference to his client is in fact 'new client' otherwise the punishment could be a major hike to 'Quills's' professional indemnity premiums.
It looks as though the Revenue was happy that allowances were given against pay, with code BR against army pension at the outset, followed by lack of liaison between the two districts which should have resulted in the issue of code DO and damage limitation to one year only. It would do no harm to enquire into the extent of inter-district communication if 'official error' or Extra-statutory Concession A19 is to be pursued. This may not be the first case of a pensioner with two – or more – tax offices for which neither has assumed the responsibility as main district for one reason or another.
It is surprising that no tax returns were issued; I have always found Public Department 2 (Army Pensions) on the ball in this respect. But what is particularly strange in this scenario is the reference to 'discovery' and the making of assessments to 1999-2000 with the last return issued in 1991, which does not stack up with Revenue procedures.
Here, the taxpayer is being denied his right to claim (what little) allowances he may be entitled to – not to mention any further higher rate tax due on possible investment income, which is another point which needs to be queried.
Specifically, two conditions need to be satisfied as far as the concession is concerned. If proper and timely use of information was acted upon correctly by the Revenue, there would be little hope in pursuing this avenue. As far as 'reasonable belief' is concerned, the Revenue view here is whether or not it was reasonable for the taxpayer to believe his affairs were in order – despite the Revenue's failure. The test, again as far as the Revenue is concerned, is not whether the taxpayer believed his affairs were in order, but whether it was reasonable to hold such a belief.
Based upon the limited facts, Extra-statutory Concession A19 would not be the argument in this case, but the specific circumstances (i.e. no returns) might guide a competent customer services manager to conduct a favourable review. 'Quills' makes no reference to interest and penalties. Arguably another Inspector may have viewed this scenario with section 7, Taxes Management Act 1970 (failure to notify) in mind! Perhaps the client should therefore be thankful for an interest-free loan over the years.
'Quills' should also be aware that if Extra-statutory Concession A19 is refused, there is no right of appeal; it is a concession after all. The logical conclusion might therefore be for the Adjudicator's Office to conduct a review, if the taxpayer is pursued. – Jim.
Extracts from further replies received:
There is one glimmer of hope for the client in respect of post self-assessment years, and that is that if his income consists solely of sources of income taxed under pay-as-you-earn, the obligation to notify a liability does not apply (section 7(3) and (4)(b), Taxes Management Act 1970). However, as the client is a higher rate taxpayer, this is an unlikely scenario. He must surely have some savings income, in which case he will be caught by ibid., section 7(4)(c) which states that the obligation to notify a liability will not apply where a taxpayer's income consists of income taxed at source, provided that he is only liable at the basic or lower rates of tax. If the client has savings income for the years from 1996-97, not only will he have to pay the tax due, but is likely to be subjected to interest and penalties. – Cumbrian.
Before self assessment, each taxpayer file had a control card that summarised each year at a glance, and this could be rapidly scanned to see if the taxpayer's circumstances had changed. Its successor, on computer, should be a 'search, compute and list' application, to reveal automatically those who have become 40 per cent taxpayers, or show large under or over payments. If there is no such application, the software is seriously inadequate, as the task is ideal for the computer. But in that case it is someone's job to review the files and make the same list. – Man of Kent.
Corporal punishment
The last year for which my client received a tax return was 1991 and at that time the Inland Revenue was aware that he had employment as well as an army pension. Subsequently he has received code numbers but no tax returns from the Revenue.
The Revenue has now discovered that he should have paid tax at 40 per cent for all years from 1994-95 and has made assessments through to 1999-2000. The total tax underpaid is £8,000.
As my client could have reasonably assumed that his code number was correct and that his income tax affairs were in order, could Extra-statutory Concession A19 be used against the arrears either wholly or in relation to earlier years only, i.e. pre self-assessment years?
Alternatively, do readers have any other suggestions?
(Query T15,757) – Quills.
It is assumed, in answering this query, that:
* the income which caused the taxpayer to move into the higher rate band was solely from the two sources mentioned – i.e. there was no savings income or other taxable amounts; and
* there was no obvious reason why the full amount of income was not taken into account for pay-as-you-earn coding purposes – such as a car benefit left off the P11D.
Clearly the case will be wholly different if either of these do apply, but if they do not then there are two possible approaches. Under section 7, Taxes Management Act 1970 there is no requirement to notify chargeability if income from a source 'has been or will be' taxed through pay-as-you-earn. In this case the taxpayer believed his two PAYE sources had been fully taken into account, when in fact they had not. He should be able to claim reasonable excuse under section 118, Taxes Management Act 1970 on the grounds that all relevant information had been provided to the Revenue and he thus did not consider he had any obligation further to notify chargeability (see Statement of Practice SP1/96).
Extra-statutory Concession A19 provides another avenue. It applies where the Inland Revenue fails 'to make proper and timely use of information supplied' if the taxpayer 'could reasonably have believed that his or her tax affairs were in order'.
When judging 'reasonable belief', the Revenue will take into account the size and nature of the error (see its Assessment Procedures Manual at paragraph AP4700). In this case the size of the error would need to be considered on an annual basis – it may have been relatively small in the earlier years, for example. The nature of the error – a belief that the Revenue coding notices would take both of the income sources into account – may fall within the concession, although it is not included in the list of examples given at paragraph AP4720.
The other factor considered by the Revenue in applying the concession is how well the taxpayer is able to understand his affairs (see paragraph AP4700). The concession is unlikely to apply if the taxpayer used an agent, see for example Pleasants v Atkinson [1987] STC 728. But in other circumstances the manual takes a tolerant approach, saying that:
'There is no statutory right of appeal against our refusal to grant Extra-statutory Concession A19 relief because it is an extra-statutory concession, not a remedy provided by the Taxes Acts. You should therefore give the taxpayer the benefit of any doubt.'
To answer the final point, these arguments will apply in much the same way both before and after the introduction of self assessment, even though the wording of section 7, Taxes Management Act 1970 altered with effect from the year 1995-96. – Maeve.
It is assumed that 'Quills's' reference to his client is in fact 'new client' otherwise the punishment could be a major hike to 'Quills's' professional indemnity premiums.
It looks as though the Revenue was happy that allowances were given against pay, with code BR against army pension at the outset, followed by lack of liaison between the two districts which should have resulted in the issue of code DO and damage limitation to one year only. It would do no harm to enquire into the extent of inter-district communication if 'official error' or Extra-statutory Concession A19 is to be pursued. This may not be the first case of a pensioner with two – or more – tax offices for which neither has assumed the responsibility as main district for one reason or another.
It is surprising that no tax returns were issued; I have always found Public Department 2 (Army Pensions) on the ball in this respect. But what is particularly strange in this scenario is the reference to 'discovery' and the making of assessments to 1999-2000 with the last return issued in 1991, which does not stack up with Revenue procedures.
Here, the taxpayer is being denied his right to claim (what little) allowances he may be entitled to – not to mention any further higher rate tax due on possible investment income, which is another point which needs to be queried.
Specifically, two conditions need to be satisfied as far as the concession is concerned. If proper and timely use of information was acted upon correctly by the Revenue, there would be little hope in pursuing this avenue. As far as 'reasonable belief' is concerned, the Revenue view here is whether or not it was reasonable for the taxpayer to believe his affairs were in order – despite the Revenue's failure. The test, again as far as the Revenue is concerned, is not whether the taxpayer believed his affairs were in order, but whether it was reasonable to hold such a belief.
Based upon the limited facts, Extra-statutory Concession A19 would not be the argument in this case, but the specific circumstances (i.e. no returns) might guide a competent customer services manager to conduct a favourable review. 'Quills' makes no reference to interest and penalties. Arguably another Inspector may have viewed this scenario with section 7, Taxes Management Act 1970 (failure to notify) in mind! Perhaps the client should therefore be thankful for an interest-free loan over the years.
'Quills' should also be aware that if Extra-statutory Concession A19 is refused, there is no right of appeal; it is a concession after all. The logical conclusion might therefore be for the Adjudicator's Office to conduct a review, if the taxpayer is pursued. – Jim.
Extracts from further replies received:
There is one glimmer of hope for the client in respect of post self-assessment years, and that is that if his income consists solely of sources of income taxed under pay-as-you-earn, the obligation to notify a liability does not apply (section 7(3) and (4)(b), Taxes Management Act 1970). However, as the client is a higher rate taxpayer, this is an unlikely scenario. He must surely have some savings income, in which case he will be caught by ibid., section 7(4)(c) which states that the obligation to notify a liability will not apply where a taxpayer's income consists of income taxed at source, provided that he is only liable at the basic or lower rates of tax. If the client has savings income for the years from 1996-97, not only will he have to pay the tax due, but is likely to be subjected to interest and penalties. – Cumbrian.
Before self assessment, each taxpayer file had a control card that summarised each year at a glance, and this could be rapidly scanned to see if the taxpayer's circumstances had changed. Its successor, on computer, should be a 'search, compute and list' application, to reveal automatically those who have become 40 per cent taxpayers, or show large under or over payments. If there is no such application, the software is seriously inadequate, as the task is ideal for the computer. But in that case it is someone's job to review the files and make the same list. – Man of Kent.
