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Our client submitted her own income tax return for 2008/09 online to HMRC in December 2009.
Unfortunately, the return was incorrect. A £4,000 repayment was received from HMRC on 18 January 2010, but knowing that this was wrong she refunded this amount on 29 January 2010.
Our client then instructed us to act on her behalf and we submitted an amended 2009 tax return on 17 February 2010. This showed a liability for 2008/09 of approximately £5,600.
Two payments on account of £2,000 had been paid by the due dates of 31 January and 31 July 2009.
HMRC advise us that the £4,000 repayment effectively cancelled out the original payments on account and interest is now being charged on these from January and July 2009 to 28 January 2010.
On speaking to HMRC, we were advised that the interest charges were wrong because our client had made the payments on account at the correct time and had immediately refunded the incorrect repayment to HMRC.
We were advised to write to our client’s tax office and that the interest charges would be cancelled manually. However, following further correspondence, HMRC now say that the interest charges are correct because the repayment cancelled out the payments on account which are effectively treated as if they have never been received.
HMRC emphasise that a small repayment supplement was given with the refund.
We have pointed out to HMRC that the whole of the repayment, including the supplement, was refunded to them and as both payments on account had been made by the correct time it seems grossly unfair that interest is now being charged for a year on the first payment on account and six months for the second payment, even though she only had the benefit of the repayment for a few days.
Can anything can be done in these circumstances?
Query 17,635 – Bamboozled.
Reply by The Dude
A look at the legislation should show what is going on here. In fact, I suspect that ‘this sort of thing’ is happening all the time and I would suggest that a good starting point is the article by Richard Curtis, ‘Accounts and amounts’ (Taxation, 24 August 2006, page 583).
This outlined the interest charges that accrued when an erroneous claim to reduce payments on account was made.
As explained in that article, the way that the legislation works does seem odd, but there is a certain logic to it; the important point to remember being that the date on which tax is ‘due and payable’ is not necessarily the same as the ‘relevant date’ for the payment of interest in TMA 1970, s 86.
I think the critical point here is in TMA 1970, s 59A(3) which states that ‘if, at any time before the 31 January next following the year of assessment, the taxpayer makes a claim under this subsection stating:
(a) his belief that he will not be assessed to income tax for that year, or that the amount in which he will be so assessed will not exceed the amount of income tax deducted at source; and
(b) his grounds for that belief,
each of the payments on account shall not be, and shall be deemed never to have been, required to be made’.
I think that this may have been the effect of submitting the incorrect tax return. The liability did not, according to the incorrect return, exceed the income tax deducted at source and the payments on account are therefore deemed never to have been made.
Once the tax paid as payments on account had been repaid, an amended tax return was then submitted and the tax liability would then have become payable ‘on or before 31 January next following the year of assessment’ in accordance with TMA 1970, s 59B(4).
However, TMA 1970, s 86 then comes into play and s 86(4) states that s 86(5) applies where – among other things – a claim had been made under s 59A(3), as was the case here. Section 86(5) then states that interest shall be payable as if the s 59A amounts had been equal to 50% of the s 59B tax liability or the payments on account that would have originally been due under s 59A ‘whichever is the less’.
Hence, in the circumstances outlined, the interest charge being backdated.
While this is the legal position, the situation does seem inequitable. It would be worth Bamboozled having a detailed look through HMRC’s Debt Management and Banking Manual, specifically DMBM210105, et seq. and asking for the tax paid on 29 January 2010 to be manually reallocated (perhaps using the ‘clerical reallocation’ function) to the dates of the payments on account.
HMRC do say, at DMBM210120, that ‘there is no right of appeal against payment allocation’, but the clients seems to have been clearly disadvantaged by the rules.
If an initial request is refused, a review could be requested.
Reply by N.K.
The background to this query highlights the irrationality that HMRC hold over the taxpayers in relation to use of monies paid.
Take for example the well known position of refunds of monies where income tax has been deducted at source.
Addition of any repayment supplement will only commence if the repayment of the overpayment in question is made following the 31 January after the tax year in question. (See FA 2009, Sch 54 Part 2, s 6.)
Anyway, back to the problem presented. Looking at the flow of monies, the client duly paid the first and second 2008/09 payments on account each of £2,000 on, say, 31 January and 31 July 2009.
The total of £4,000 was returned by HMRC to the client on 18 January 2010 and the client repaid the sum to HMRC on 29 January 2010.
The client therefore has use of the £4,000 for (approximately) 11 days, but has been charged for 363 and 182 days late payment interest in respect of the £2,000 relating to the first and second payments on account. I wonder if in HMRC’s ‘further correspondence’ there is reference to which part of the legislation allowed their current course of action?
However looking at HMRC’s Enquiry Manual, EM4001 defines the background to the reasons behind the charging of interest on late paid tax:
‘There is no right of appeal against interest.
‘Any interest “objections” should be referred to the following the guidance in the Self Assessment Manual/COM Manual as appropriate – see EM4040.
‘Note: the taxpayer’s rights are protected: the underlying tax can be appealed, and if the tax is reduced the interest on that tax will automatically be reduced.
‘There is no statutory power to mitigate interest. See EM4040.
‘Interest is in no sense a penalty.
‘Interest is restitution for loss of use of money over time, like any commercial interest. If the taxpayer has enjoyed the use of the money over a period when the exchequer should have had it, he pays this interest for that use just as he would pay his bank interest for a loan or overdraft. Interest is compensatory, not penal.’
Looking in the Enquiry Manual at EM4040 (‘Mitigation’), which refers to TMA1970, s 86, this states that:
‘There is no specific power to mitigate interest. Only the general “collection and management” responsibility of the Commissioners for HMRC under CRCA 2005, s 5 is relevant.
Where there is an objection to an interest charge this should be referred to the DMB (Debt Management & Banking) Interest Review Unit following the guidance in …[the] Self Assessment Manual for an ITSA interest charge…’
Obviously, if the person(s) dealing with this matter at HMRC refuses to see the logic behind what has occurred then I would recommend taking this matter to a hearing before the First Tier of the Tribunal as soon as possible.
