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KEY POINTS
- HMRC misunderstandings.
- Additional income confessions.
- Attempting to set things right.
- HMRC system failure.
All in all, I like to think of myself as someone who can attempt to persuade people to do the right thing. Whereas HMRC may believe tax advisers are in league with Beelzebub; some of my clients think I am in league with HMRC. I, like most professionals, regard myself as an upholder of truth, justice, motherhood and apple pie. Especially apple pie. But sometimes HMRC make it hard...
Miriam came to me with a corporation tax problem whereby I discovered that she had bought and sold some shares in the company. Due to the obscure workings of the identification rules and an existing holding of shares, her gain was much bigger than she had thought.
In late 2008, I approached HMRC to make a disclosure and settle the capital gains tax which should have been paid in respect of 2003/04.
Conflicting views
An extremely helpful and co-operative inspector agreed to charge no penalty because the rules were confusing and it was a wholly unprompted disclosure.
However, when he reviewed her entire records, he was bemused as to why her PAYE coding did not reflect her state pension. The reason for this was because Miriam actually believed she was not receiving one as she had asked Department for Work and Pensions (DWP) to defer it at the beginning of 2007.
It may seem surprising that someone can have received a state pension – including a backdated lump sum – without realising, but Miriam had been preoccupied with the company’s finances (the argument over corporation tax was threatening to break the business) and she had failed to understand or deal with various letters from DWP.
They had misunderstood her instructions and had not only started to pay the pension in 2007 but had backdated it by a year. When it was added to her salary, there was 40% tax to pay from 2005/06 on.
The officer who dealt with the CGT problem passed me on to the PAYE office. They were slower, but still produced a favourable result: by treating the underpayment in each year as something that could be carried forward to the next, a single liability was assessed for 2007/08 covering three years without any interest (including about £3,000 for 2007/08 itself).
My client was moved onto self-assessment for 2008/09. I filed her return for that year showing the pension and everything else and thought life was good.
Meanwhile, I persuaded DWP to pay her compensation for so ignoring her instructions. Her pension was taxed at 40% because she had not yet retired: if they had waited until the intended later date, she would have paid nil or 20% because she would not have had any other income. Or would she?
I should have anticipated by now that Miriam did not understand tax and would not give me information unless I asked very careful questions. I discovered by chance that she had an interest-bearing bank account which had not been declared.
Miriam: ‘Surely that’s already taxed?’
Thexton: ‘Not at 40%, it isn’t’ – and therefore she did not complain at having to return to the HMRC.
This was the point where it started to go horribly wrong.
Attempting to amend
On 9 May 2009 I wrote to the same PAYE office to confess to the extra income. There would be small liabilities going back to 2004/05, which I calculated for them. By late June I had had no response, so I telephoned. The post for early May had been opened by this point and they had no record of the letter, so I sent it again.
I chased it again in September. I spoke to a very apologetic officer who said that, in consideration of the trouble, delay, and the voluntary disclosure (in spite of it being the second voluntary disclosure in quick succession), she would forget about the liabilities for the earlier years and only ask for £150 for 2007/08. Miriam used the payslip provided and sent a cheque.
In February 2010 a different officer wrote to me asking what this cheque was for: they could not match it to a liability on their system. I wrote back expressing some surprise, as they had asked for it.
In May 2010 the officer replied, explaining that now Miriam was registered on the self-assessment system, a liability for 2007/08 could not be created without submitting a tax return for that year. He enclosed a paper form, because I could not file online so long after the event. Groan!
Miriam was travelling abroad for much of the summer, so I only met up with her to get the return signed in September. Following this, I sent it back to the same officer with a covering letter explaining that the return had been completed for the convenience of HMRC’s systems, but that all the information was already in their hands and the liability had been paid in full.
Banging heads against brick walls
Another month passed: Miriam received a demand in respect of 2007/08. Not for the £150 that she paid in November 2009, but for £3,150 (plus interest running from 31 January 2009). It seems that the system cannot match up the self-assessment return with either of the payments already made.
I rang the agent line (holding a piece of paper on which I had written in large letters IT IS NOT THE FAULT OF THE PERSON I AM SPEAKING TO) and asked for the client not to be bothered by debt management while the office concerned tries to trace the payments.
The helpful and polite officer said that the office concerned would ring me back. I am waiting ...
But in the meantime, and as a little postscript, a surcharge notice has now arrived – so my phone call to HMRC to tell them that the payments have been settled has not achieved anything yet.
Given that my letter explaining the circumstances will not be opened until some time in February, it’s hard to see how I can make progress.
Mike Thexton MA FCA CTA is a director of Thexton Training Ltd, and winner of the 2010 Taxation Awards' Tax Writer of the Year.
