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Replies to Queries -- 2 - Unfair interest on tax

30 May 2001
Issue: 3809 / Categories:

Our clients formed a partnership on 3 May 1999, which was later dissolved on 2 November 2000. Profit and loss accounts were prepared for the 18-month period ended 2 November 2000 showing substantial losses. Our clients claimed losses under section 380, Taxes Act 1988 whereby the appropriate losses have been set against their other income.

Our clients formed a partnership on 3 May 1999, which was later dissolved on 2 November 2000. Profit and loss accounts were prepared for the 18-month period ended 2 November 2000 showing substantial losses. Our clients claimed losses under section 380, Taxes Act 1988 whereby the appropriate losses have been set against their other income.

One of our clients, Client X submitted her 2000 tax return on 15 March 2001. The client was advised that £162,498.82 was due and payable on 31 January 2001 after taking into consideration her claim to carry the 2000-01 losses back to 1999-2000. Due to financial difficulties, the tax bill was not paid until 13 February 2001.

We appreciate that interest will be payable on £162,498.82 for the 13 days the tax was outstanding. However, the Inspector states that interest is payable on £166,852.08 and that the credit of £4,353.26 which relates to the 2000-01 loss must have an effective date of payment as 15 March 2001 (this being the date the 2000 tax return was submitted).

We appreciate that a claim to carry losses back normally results in a repayment and that repayment supplement cannot be given. We do not, however, feel that it is fair to charge interest on an amount that is not due and had our client paid it before 31 January 2001, the Inland Revenue would have merely repaid the same amount back.

Advice would be greatly appreciated, as the Inspector is refusing to withdraw the interest charge which relates to the £4,353.26.

(Query T15,813) – JDW.

 

'JDW' highlights an important, but complex consequence of self assessment. In order to prevent years of assessment from being reopened, claims affecting two years are dealt with in a special way. The rules can be found in Schedule 1B to the Taxes Management Act 1970 (as inserted by Finance Act 1996).

In short, they provide that carry-back claims (such as those under section 380, Taxes Act 1988) do not affect the calculation of tax due in respect of the earlier year; instead, they give rise to an adjustment to the tax liability of the latter year. As 'JDW' correctly states, the normal consequence of this is that a repayment is generated but without repayment supplement.

However, it is important to consider how the statute provides for the adjustment to be given effect. Paragraph 2(6) of Schedule 1B states that 'effect shall be given to the claim in relation to the later year, whether by repayment or set-off, or by an increase in the aggregate amount given by section 59B(1)(b) of this Act [Taxes Management Act 1970], or otherwise'. The first leg of this provision ensures that the relief is given in respect of the later year – in Client X's case the 2000-01 year of assessment. The second leg gives the Inland Revenue four ways to give effect to the relief. The first three all provide for relief to be given once the tax liability for 2000-01 is known. That is not likely to be for several months. Further, the Inland Revenue is obliged to give relief for the claim 'as soon as practicable after [it is] made' (in accordance with paragraph 4(1) of Schedule 1A). To this end, the Inland Revenue has correctly given relief to the loss claim in the form of a credit on the date on which the tax return referring to the loss claim was submitted.

Whilst it is true that an earlier payment of the £4,353.26 would only have triggered its subsequent repayment, this does not automatically mean that the interest charge is incorrect. To use an analogy, if I were to owe a sum of money on my credit card, the fact that a third-party credit will be made to the account after the due date for the payment would not nullify any interest accruing in the meantime.

Having considered the general rules concerning relief for the carry-back of losses, there are two issues that may give Client X a glimmer of hope. First, 'JDW' does not mention any imposition of a surcharge. Whilst there could be a number of explanations for this, one possibility is that the tax due of £162,498.82 (or at least some of it) actually relates to a payment on account for 2000-01. If this is the case, then, in view of the substantial losses incurred, 'JDW' may find that the actual liability for 2000-01 is somewhat lower than the payments on account calculated by reference to the liability for 1999-2000. Consequently, the £4,353.26 supposedly paid late may turn out not to have been due at all and so any interest charged will be refunded.

Secondly, it has been assumed that the rules for calculating profits and losses in the opening years of a business have been correctly complied with. In particular, the loss for the period from commencement to the next 5 April (here 3 May 1999 to 5 April 2000) is automatically attributed to the year of commencement (1999-2000) under section 61(1), Taxes Act 1988. As a result, any claim for loss relief under section 380(1)(a) will not give rise to the 'unfair interest charge'. It is only the balance of the loss that will require a carry-back election under section 380(1)(b). If the £4,353.26 refers to the value of the tax relief in respect of the full 18-month trading period, then 'JDW' should send a revised return for 2000; this will in turn reduce the amount of tax paid 'late'. – Kalonymous.

 

An interest charge is raised by statute, being equally as valid as a tax assessment. The Revenue raises all charges by law, not on an ad hoc basis dependent on whether millions of taxpayers can persuade individual officers about what is 'fair'. If this particular interest charge is not in accordance with statute, the taxpayer can appeal and take it before Commissioners. The querist does not suggest there is any flaw or any grounds for appeal.

If he thinks the law is not 'fair', he cannot ask the Revenue to alter it since the department's duty is to administer the law, not to have opinions about it.

The querist should check the charge carefully for any defect; he can then appeal by quoting the statute which has been broken. If the charge is valid, it must be paid. – W.T.G.

Issue: 3809 / Categories:
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