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Interest payable on underpaid CGT?

Is there interest due on underestimated CGT on sale of residential property?

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Having to report and pay the CGT due on the sale of a residential property within 30 days of completion means I have to estimate my client's income for the year to 5th April 2022 to establish the CGT rate applicable.  

If it turns out the estimated income was too low and therefore the CGT liability originally calculated is less than it should be, is there interest payable on the underpayment in the same way as SA payments on account?

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By SXGuy
16th Jul 2021 11:15

No. The payments are estimates on account. Estimates based on many factors including estimated earnings for the year.

Given its an estimate, I don't see how they could retrospectively charge interest.

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By Tax Dragon
16th Jul 2021 12:43

Because the estimate was too low?

What may be unfair (compared with the QIP position for companies) is that there's no supplement if you overestimate. But then HMRC didn't think anyone would ever overestimate. Else they wouldn't have naused up the implementation quite as badly as they have.

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By Kezza43
16th Jul 2021 11:29

That's what I thought but couldn't see it written anywhere.

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By Hugo Fair
16th Jul 2021 12:18

Indeed, it doesn't appear to be documented ... which is why a number of member's here (or rather their clients) decided to do the 'obvious' thing - be ultra-cautious and use the higher %age rate ('after all it's only a POA so you'll get it back later if appropriate').
Except, as per countless threads on here and Institute articles, it looks like there's a flaw in the legislation & HMRC procedures that's currently preventing all those repayment claims being processed!
So you're damned if you do and damned if you don't ... despite logic, it is possible that HMRC will seek penalties/interest on what they see as underpayment.

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By Kezza43
16th Jul 2021 12:26

I suppose we will need to demonstrate that we have taken reasonable care with the estimated income calculation and therefore the CGT comp.

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By Tax Dragon
16th Jul 2021 12:41

I take issue with the accusation that the legislation is flawed. It's a piece of art, IMHO. (Have a read.)

HMRC's IT, on the other hand, is not fit for public display.

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Replying to Tax Dragon:
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By Hugo Fair
16th Jul 2021 20:16

Sorry ... bit slapdash with the wordsmithery (that's twice in one day I've had to apologise)!
Your second para is however spot on, albeit restrained ... not fit for public display or general consumption & an indictment of current IT procurement and development policies (agile development within a sandbox, indeed)!

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By Martin B
16th Jul 2021 15:59

Given ( as it stands ) that we are unable to recover an overpayment of CGT paid through the SA return, I would have thaught, every effort should be made to under pay and than pay the balance when submitting the SA return and the normal due dates.

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Replying to Martin B:
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By Kezza43
16th Jul 2021 16:11

I will ask the client to give me their best estimate of 2022 income and just estimate the CGT liability based on that, I don't see how HMRC could argue with that.

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By Tax Dragon
16th Jul 2021 16:39

What do you mean by "argue"?

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By richard thomas
18th Jul 2021 14:34

This post is in response not only to the original post but also to comments made in the thread and comments by matrix in Helen Thornley’s article “Capital gains reporting SNAFU eased by HMRC FAQs”.

I will also comment on some parts of the HMRC FAQs under the article.

The law relating to interest on tax paid late is contained in section 101 and Schedule 53 FA 2009, but only where that legislation has been the subject of a commencement order (see s 104(3) FA 2009), otherwise for income tax and CGT the position is governed by s 86 TMA 1970.

The only relevant commencement order that I can see is SI 2011/701 (the Finance Act 2009, Sections 101 to 103 (Income Tax Self Assessment) (Appointed Days and Transitional and Consequential Provisions) Order 2011). This brought s 101 FA 2009 into force in respect of “self-assessment amounts”, defined in regulation 2 to mean (relevantly):

“any tax or other amount in relation to which, for any tax year—

(a) a return falls to be made under—

(i) section 8(1)(a) of the Taxes Management Act 1970 (personal return),

… or

(b) an assessment is made under section 29 of that Act (assessment where loss of tax discovered), … “

The reference to “other amount” refers to income tax PoAs (which are not tax, as discussed in another thread).

The amount payable under paragraph 6 FA 2019 is clearly an “other amount” even if it is not CGT. The problem for HMRC is that interest under FA 2009 does not apply to cases where no “return falls to be made”. The question is: where a non-SA taxpayer makes a gain on residential property and is liable to pay under Schedule 2 FA 2019, does a return fall to be made by them? The obvious answer is yes, because they have an obligation to notify chargeability under s 7 TMA (see s 7(3)(b)). However there are two counter-arguments. One is that an obligation to notify liability does not someone obliged to make a return – it is the section 8(1) notice that may or may not be issued that does that.

Two is that paragraph 18 Schedule 2 removes the obligation to notify if a CGT return is made unless the CGT return shows less tax than is ultimately due (another reason for overestimating the notional CGT?)

The fallback position for these people is then s 86 TMA. But that explicitly applies to SA PoAs and s 59B tax only.

There is however an oddity lurking at the tail end of Schedule 2 FA 2019 in paragraph 31.

“So far as relating to amounts that are payable (or repayable) as a result of a requirement under this Schedule, sections 101 to 103 of FA 2009 (late payment interest on sums due to HMRC etc) come into force on 6 April 2019.”

The inferences of this are:

(1) Section 101 would not otherwise apply to the amounts on account of CGT. But why not (see above)? Maybe it only affects the non-SA cases which it does clearly apply to, or it’s just belt and braces (or ex abundante cautela, as it used to be called when legal Latin was permitted).

(2) The refence to section 102 casts doubt on tax dragon’s point in their post of 16 July at 12.43. The failure referred to may of course be due to HMRC incompetence.

(3) Since no statutory instrument commencing the application of s 101 FA 2009 to these CGT amounts was made (unlike the position for other new taxes such as ATED, DPT etc) paragraph 31 must be regarded as a non-textual amendment to section 101 permitting it to come into force for these specific purposes without an SI.

It thus seems relatively clear that interest is payable by the taxpayer if an amount on account of CGT is paid after the due date (30 days after completion) (section 101(4) FA 2009). The OP asks though:

“If it turns out the estimated income was too low and therefore the CGT liability originally calculated is less than it should be, is there interest payable on the underpayment in the same way as SA payments on account?”

My answer is no, as there is no underpayment, merely an underestimate. My reasoning is this.

There can be no interest charged unless an amount becomes due and payable under paragraph 6 or elsewhere in Schedule 2 FA 2019. A payment under paragraph 6 is of the notional CGT at the filing date. Paragraph 7 defines the notional CGT as at that date and sub-paragraph (4) points to the provision allowing estimates and assumptions. Paragraph 14(1) allows it to be assumed that a subsequent event may affect the tax, but the expectation that it will and so the change in the amount concerned must be reasonable.

Paragraph 4(4) says the same about estimates. It must be reasonable to make an estimate and the estimate must be reasonable. This specifically includes estimates about the rate of CGT (paragraph 14(5)).

Paragraph 15 deals with cases where, among other things, after the disposal it becomes reasonable to make a different estimate in relation to the rate of tax, or that reliefs will apply or values become known, having previously been estimated.

If this happens the taxpayer “may (but need not)” (ie it is voluntary) assume:
(a) that there is an additional disposal to which this Schedule applies,
(b) that the additional disposal completed at the later time by reference to which this paragraph applies, and
(c) that the additional disposal is in all other respects a replication of the actual disposal.

Given it is voluntary this paragraph must be aimed at those cases where the result of the paragraph 15(1) circumstance happening is that the notional tax is lower than the tax returned and paid. That this is the case is reinforced by the Explanatory Note to Schedule 2 to the Finance Bill:

18. Paragraph 15 provides that where an expectation or estimate under paragraph 14 changes after being included in a return, a further return may be delivered under paragraph 3 securing the application of the repayment provisions at paragraph 8. For the purpose of determining the amount of tax notionally chargeable under paragraph 7 a new disposal is deemed to take place and the actual disposal is ignored.
19.
The important word in these paragraphs is “reasonable”. If the estimate is unreasonable then Part 2 contains various familiar provision under which HMRC may intervene. If they do and the amount on account of CGT becomes greater than the amount returned, interest will run on the increased amount from the due and payable date of the return under investigation.

Part 2 also contains a taxpayer amendment provision, paragraph 19. This it seems to me only applies to allow an amendment to the return by reference to matters that were known at the date of the return, eg the figures were incorrect either way because of a mistake, about eg the amount of PPRR due. The interest rules about section 9ZA TMA amendments will apply (see paragraph 19(1) and (5) and paragraph 3 Schedule 54 FA 2009).

I have to admit to not fully understanding the OP’s comparison with income tax PoAs. IT PoAs are based on last year’s figures and are not meant to equate to the final liability for the year for which they are paid. In my view interest runs on PoAs only insofar as the amount calculated by HMRC (or the amount as reduced by a claim) is not paid on the due dates, and interest runs on a balancing payment from 31 January whatever its level.

Thus I agree with SXGuy (16 July 11.15) and disagree with the last paragraph in Hugo Fair’s post of 11.29. Kezza43 (the OP) (12.26) is right but only if HMRC open a proper enquiry under paragraph 20 or issue a discovery assessment under paragraph 23. This is not going to happen if the notional tax is overestimated. As to Martin B’s post of 16.11, deliberate underpaying could lead to HMRC intervention. This is not the same as the OP’s position, which is simply asking if the actual tax “turns out” to be too low (if that is a meaningful concept).

The answer to matrix in the Helen Thornley article is “No, if you don’t want to, providing your original figures were reasonable.”

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Replying to richard thomas:
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By Tax Dragon
19th Jul 2021 14:41

Yes, it does look as if my comment about repayment supplement was ill-considered.

However, if the law has the effect you say (and with which saying Basil agrees), and assuming that that was the intended outcome, then my comment about the artistry of the draughtspersonship was, I think, well-made.

I have reappraised The Dullard's comment (21st Jun 2021, 16:29 https://www.accountingweb.co.uk/any-answers/residential-property-capital...) in the light of your dissertation. It now seems to me that Dulls may have been suggesting that HMRC would not be able to charge interest on a CGT underestimate, provided that enough was paid on account to cover the CGT liability calculated without reference to income.

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By fawltybasil2575
19th Jul 2021 12:35

@ Kezza43 (OP).

Your question was:-

“If it TURNS OUT THE ESTIMATED INCOME WAS TOO LOW (emphasis added) and therefore the CGT liability originally calculated is less than it should be, is there interest payable on the underpayment . . . . ?”

The answer lies in establishing the meaning of the capitalised words. If, as seems probable, you mean that, when submitting the Return, all the estimates used were REASONABLE (and of course that the Residential Property Gain Return was, in all other matters, correct; and the payment made in time) then NO INTEREST is payable, since the Return was correctly submitted and payment made timeously.

The fact that, AFTER submitting the Return, the taxpayer and/or his agent obtains information which indicates that one or more of the estimates on the submitted Return has been found to be incorrect (in circumstances which the taxpayer was not aware of when the Return was submitted) does NOT render the Return incorrect, and hence no interest is payable as a result.

If, alternatively (albeit I surmise from your posts that this is less likely) the Return was incorrectly submitted (whether in relation to the inclusion of UNREASONABLE estimates and/or other incorrect figures) then interest IS payable (if of course the use of incorrect estimates resulted in the tax actually paid being too low).

Basil.

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Replying to fawltybasil2575:
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By Kezza43
19th Jul 2021 13:01

Thanks everyone for your replies, I went back to the client for a calculated estimate of the income and submitted the return.

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Replying to fawltybasil2575:
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By Tax Dragon
19th Jul 2021 14:40

Sorry to disturb, Basil... it makes more sense if I post in the correct place!

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By richard thomas
20th Jul 2021 14:10

Is there a glitch in the interest rules for CGT 30 day returns?

The assumed facts.

An individual (X) sells a residential property early in the tax year on which a chargeable gain arises and a return is made within 30 days of completion showing notional CGT of £100,000.

The amount on account is not paid however until the 130th day after completion, and a bill for interest at 2.6% pa for 100 days making £ 712 is charged.

After the tax is paid X realises that the notional CGT is too high because of a matter falling within paragraph 15(1) Schedule 2 FA 2019. X therefore makes the assumptions in paragraph 15(2) as a result of which the notional CGT becomes £20,000 the interest on which would have been £142. X makes a further return and an application for repayment under paragraph 8. The repayment of £80,000 is made.

What is the correct treatment of interest on unpaid tax?

The charge of £712 was in accordance with the law in s 101 FA 2009, as the due and payable date under s 101(4) was that of the 30th day after completion.

The answer is clear if this had been a reduction in IT PoAs due under s 59A TMA 1979. Paragraph 2 Schedule 53 FA 2009 reduces the interest amount and the interest amount adjusted (and repaid) under paragraph 15.

But there is no such provision on the face of Schedule 53 for the reduction of interest arising from reductions in the amount of notional CGT under paragraph 15 Schedule 2.

What if instead a person makes an amended return under paragraph 19?

Sub-paragraph (1) applies s 9ZA TMA to the amended CGT return, but the provisions of Schedule 53 relating to amendments only apply where the amendment increases the amount of tax due, and so the position is the same as for the paragraph 15 case.

Repayment interest does also though arise in this, a paragraph 15, case. Section 102 is wholly general about the nature of the repayment. The repayment interest start date (RISD) is governed by Part 1 Schedule 54 FA 2009. In a case where as here an amount has been paid to HMRC (the £100,000) the RISD is the later of (A) the date of payment (130 days after completion) and (B) the due and payable date (30 days after completion). So repayment interest only runs on the £80,000 from date A.

In a case where a paragraph 19 amendment reduces the notional tax, there is also repayment interest at 0.5% on any repayment of tax from the date of payment (paragraph 4 Schedule 54).

The conclusion seems to be that the late payer of notional CGT who has good cause to reduce the amount is worse off than the late payer of an income tax PoA who reduces the PoAs under s 59A TMA.

I can see no justification for this. But this conclusion may be wrong because I have misinterpreted the law or overlooked a relevant provision, and as always I am happy to be proved wrong.

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Replying to richard thomas:
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By Tax Dragon
21st Jul 2021 17:20

I don't think you are wrong.

But I think it not as unreasonable as you suggest. Or, at least, if it is unreasonable, it's not wholly illogical. Payments on account of income tax are based on the previous year's liability. Say £1,000 each. But the income tax liability for the year turns out to be £1,000 in total. When the return is filed, HMRC automatically adjusts both amounts due to £500.

The January payment was made on time. The July payment wasn't made at all. Without provision to the contrary, and absent a claim to reduce the PoAs, there'd be interest on the July payment that was never, and never had to be, paid.

My take on CGT (based on too little study of the rules, I grant you), is that the system is predicated on people making the POAs when the POAs are due. (Is it possible to claim to reduce these?) That being so, the unreduced interest charge on late payment makes some sort of sense. Doesn't it? (At least, I can see it would if your usual abode was an ivory tower.)

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