Overpayment Relief

I have a client who was way behind but who has had a long history of illness.

Her tax affairs were brought up to date in November 2011 when Tax Returns for years 2007 to 2010 were filed. The 2007 Return was a paper one. All liabilities were paid or covered from overpayments.

For 2007 interim payments had been made of nearly £800 based on the 2006 liability but the final laibility was nil. A claim was made for overpayment relief and documentary evidence from my client's doctor was submitted to back up her history of illness in support of the claim.

This claim has been ongoing for some time and I have now been informed by HMRC that no claim can be made as HMRC did not issue a formal determination for the 2007 liability so that year is essentially in limbo and no repayment can be made as it was out of date when the original claim was made.

Is this correct?

Is the tax bill for 2007 determined by default even though a formal determination was not made by HMRC? 

If HMRC failed to issue a determination can they now say that because they failed to do their job properly our client cannot have a repayment?

In the event of the 2nd scenario is there a default to the old ESC?

Any thoughts gratefully received!