A neighbour (really) made a royal mess of his 2009/10 tax return, overstating schedule E income and more importantly overstating tax deducted at source. The errors appear to stem mainly from him misreading his P60, which had been printed out of alignment with the stationery. On receiving his return, HMRC issued a refund for the difference between the tax deducted at source on his return less the tax actually deducted at source. Neighbour received the refund without appreciating what it was for. In fact his standard tax code exactly covered his liability for the year (but not tax due from the previous year - see below).
I have to confess that personal tax isn't my cup of tea, but I did say I would look at it for him. Having gone through the numbers I agree that he did get a repayment when he shouldn't have and also that, because they accepted the figures on his return, HMRC failed to demand another £1,000 that they claim had been coded out from 2008/09 into 2009/10 (although neighbour and his employer have no knowledge of a notice of coding for this). Neighbour is now unemployed and doesn't have the funds to make the repayment and pay the tax from 2008/09. My instinct is that he should pay it, but I feel I ought to also check that he is required to pay it.
Looking at schedule 29, HMRC need to rely, I believe, on either s.29(4) [fraudulent or negligent conduct] or s.29(5) [officer couldn't be expected to be aware of the need for assessment]. As the assessment relates solely to schedule E income and in particular to tax deducted at source for which HMRC had full details, presumably HMRC cannot now argue a case for s.29(5), which leaves fraud or negligence. Have I got this right, and do people here feel HMRC have grounds for claiming negligence?
Next question: HMRC have written that they intend to charge a penalty for failure to take reasonable care. Are there grounds for challenging this?
Final question: Ignoring section 29 for now, presumably HMRC are able to reclaim the over-repayment [repayment made in 2010/11; this correspondence started in 2011/12]. Is this correct?