Keith Gordon is outraged at the proposed abolition of equitable liability. He has written an article on the government’s proposals to remove the equitable liability concession, which is based upon the principle that individuals should be required to pay no more than the right amount of tax.

Summary explanation of equitable liability

Equitable liability is a remedy of last resort for taxpayers who have fallen behind with their tax affairs. It applies in cases where a taxpayer is facing the enforcement of a tax assessment and/or determination which has become final and conclusive (for example, because of the lapse of time in which an appeal would have been allowed) but the taxpayer can provide satisfactory evidence to show that the assessment or determination is in fact excessive.

Typically, this will occur in cases where a taxpayer has started an activity that has proved to be profitable and, for whatever reason, has failed to register for tax. In many cases, the difficulties faced by such taxpayers will often be compounded by family and other financial problems leaving the unfortunate taxpayer like the proverbial rabbit in the headlights. When HMRC come knocking, panic will often set in and it is only when the bailiffs come will the taxpayer seek help.

Provided that the taxpayer can demonstrate that the true tax liability is lower than the assessment or determination, HMRC will, by concession, seek only the lower amount, notwithstanding the assessment or determination that entitles them to demand the additional sums.

The profession’s awareness of the practice

As with many non-statutory practices, not every tax adviser is aware of the practice. In 1995, the then Inland Revenue published an article in their tax bulletin in order to fulfil a promise made by the department to make more people aware of the practice. More recently, in March 2009, it was the subject of an article by TaxAid’s Harry Fulton in Taxation. Indeed, it is within the charitable sector (particularly, LITRG and TaxAid) where the profession has had most cause to use the practice because it assists mainly those individuals who do not have access to professional advice.

Proposed withdrawal of equitable liability

In recent weeks, HMRC have announced that they now wish to withdraw the practice. They cite several reasons. None, in my view, is a sufficient justification for the complete abolition of the practice that can prove to be a lifeline (in some cases, I suspect, literally) for individuals.

First, HMRC cite that the practice was originally introduced when the Crown had preferential rights in cases of insolvency. Whilst that is true, it was stated back in 1995 that the former Inland Revenue would equally apply the practice in non-insolvency cases. Therefore, citing the original source of the practice is disingenuous.

Reason 2 is that the introduction of Self Assessment has “eroded the justification for accepting time barred information”. Well, again, one can refer HMRC to the 1995 article. That specifically looked forward to the then imminent introduction of Self Assessment, noting that the régime would change the relevance of equitable liability. Nevertheless, the former Inland Revenue explicitly accepted that, where the conditions were met, they would be “extending their [previous] practice to meet this situation”. Therefore, citing the introduction of Self Assessment is plain dishonest.

Reason 3 is that the Wilkinson decision in the House of Lords prevents HMRC from exercising administrative discretion in many cases. Here, I accept that HMRC have a point. However, this is not insurmountable. Most people at HMRC are aware that there is an annual event known as the Finance Bill. This allows new laws to be passed in accordance with the wishes of Parliament. Where unfairness has come to light, I would suggest that the law be amended so as to allow equitable liability to be retained. Alternatively, HMRC could use its powers in section 160 of last year’s Finance Act which permits previous extra-statutory practices to be legitimised, something that has already happened in some cases precisely in order to get around the Wilkinson problem. In short, by citing Wilkinson, HMRC are just making excuses.

Summary
In my view, the idea of withdrawing the practice is outrageous. It will leave exposed the most vulnerable members of our society, with negligible advantage to the Exchequer. At a time when MPs are being criticised for over-decorating their second homes, MPs should consider retaining a measure that could save some taxpayers their only home.

What you can do

If you agree, I would urge you to write to HMRC via this link. I have also started a petition [1] on Number 10’s website and would urge AccountingWEB.co.uk members to sign up to it.

Knowing that a general election is imminent, I also propose to raise the issue with anyone who (draws the short straw and) knocks on my door in the coming months.

In the meantime, I hope that anyone who has used the practice (or might have done had they been aware of it) will prepare a brief summary of the circumstances of each such case, add it as a comment below so that the value of the practice can be clearly demonstrated. With such evidence, it will be hard to see how anyone with an ounce of humanity could let the practice be abolished.

Keith Gordon is a barrister, chartered accountant and tax adviser. He practises from Atlas Chambers (020 7269 7980, www.atlaschambers.com [2]) where he provides litigation support and advice on tax and general chancery matters to accountants, tax adviser and lawyers. Keith can be contacted by e-mail at keith@KeithMGordon.co.uk [3].
Keith was the 2009 winner of Chartered Tax Adviser of the Year at the LexisNexis Taxation awards.