Refund of tax previously claimed as DTR

Can HMRC charge interest when double tax relief repaid by taxpayer

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We have a UK resident client who did some work in Sweden.  The Swedish tax office deducted 30% Swedish tax.  We declared the income and paid the balance of 10% higher rate tax to HMRC.  This went on for several years.  In 22/23 the Swedish tax office said they shouldn't have been deducting tax from the outset, and paid it all back to the client.  We wrote to HMRC, told them what had happened, and repaid all the DTR previously claimed.  HMRC now want interest on it - which adds up to a fair sum.  Has anybody come across this before, and are there any grounds for claiming that the credit is just an adjustment in 22/23 and should not be treated as adjustments to earlier years?  Thanks!

Replies (21)

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By Ruddles
12th Feb 2024 16:52

The Swedish tax office deducted tax? Do you not mean your client's customer? (Assuming said customer was not the Swedish tax office.)

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By David Ex
12th Feb 2024 17:04

euanjohn wrote:

In 22/23 the Swedish tax office said they shouldn't have been deducting tax from the outset, and paid it all back to the client. 

Did they pay interest?

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By euanjohn
12th Feb 2024 17:15

Thanks for your quick replies. Yes, it was a Swedish employer and no, they didn't pay any interest.

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By Ruddles
12th Feb 2024 17:51

If the Swedish employer deducted tax when they shouldn’t have your client was not entitled to treaty relief. It is my understanding that adjustments/assessments need to be made for the years in question, with interest charged on the tax underpaid.

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By richard thomas
12th Feb 2024 17:53

If the client repaid it voluntarily, ie without an assessment, interest is not payable as far as I can tell from a quick read of Schedule 53 FA 2009 and s 86 TMA (in case that is still relevant).

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Replying to richard thomas:
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By David Ex
12th Feb 2024 18:13

richard thomas wrote:

If the client repaid it voluntarily, ie without an assessment ….

Genuine question. How do you do that?

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By kim.shaw-and-co.com
13th Feb 2024 01:20

Contract settlement for voluntary restitution in respect of years HMRC are out of time to issue a discovery assessment for income tax or make a Section 8 Decision for NIC. You can run it through voluntary disclosure unit. But why would you offer that ?

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By Tax Dragon
13th Feb 2024 05:34

It's not an agent's place to decide to offer or not to offer. That's not the question. Put the alternatives before the client/taxpayer/HMRC customer and let them decide.

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By More unearned luck
12th Feb 2024 20:28

Presumably the most recent year and perhaps the year before that was/were treated as a taxpayer amendment.

This brings to mind the case of poor Mr Steiner (TC5650) who amended his return
to remove a relief he had claimed and got stuffed with 10% in LPP by HMRC and received no succour from the FTT, despite the penalties not being due.

For the earlier years the options appear to be: DA, contract settlement or voluntary restitution. The last should only apply when HMRC are out of time to issue assessments.

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By taxdigital
12th Feb 2024 21:42

If the employment was exercised in Sweden for a Swedish employer, I can’t see anything in the treaty stopping Sweden from taxing it. So my guess is that OP’s client may be self-employed in which case s.33 TIOPA conditions may be in point. Consequently HMRC may be right.

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By kim.shaw-and-co.com
13th Feb 2024 01:25

If the FTC was incorrectly claimed, there ought to be assessment(s) for the effect of its removal for a minimum of 4 tax years. That can be dealt with through amending 'in time years' via SA amendments first-off. The clawbacks then won't be due for 30 days after the amendments are made and no interest would apply if put through SA.

Then, having amended returns wherever possible, a contract settlement can be offered for remaining 'in time' years. Interest would apply in the usual way from the original due date(s) in the calculation. That likely ought to go/have gone through voluntary disclosure unit.

Self-assessing whether the error was careless is not so easy if it ought to have been evident the source of income was treated as being the UK from reading the Treaty and as such, any repayment should have been sought from the foreign tax authority rather than a DT credit being claimed here. However, in any such settlement interest would apply anyway.

Always amend the SAs if you can before submitting a disclosure for earlier years - it is expected. As for out of time years ...... where are HMRC's assessments and are they validly made in time limits ? You can appeal them if they are out of time (provided still in time to do so) and then take voluntary restitution off the table, but dealing with this through inspector(s) is probably not the best way to deal with it. If that ship has sailed then you'll need to push the paperwork.

Just appeal the assessments for any out of time years and that should allow you scope to cancel repayments. Best never to let HMRC calculate what you owe in a dispute or disclosure and to offer what you think you properly owe taking assessment time limits into account !

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By richard thomas
13th Feb 2024 10:50

The comments so far (mine apart hopefully) do not seem to have addressed the question the OP asked. Some of them seem to be suggesting courses of action or warning of possible deleterious outcomes which do not seem relevant, given what we know of the circumstances.

I hope it will help all, especially the OP, if I expand on what I said earlier.

It is obvious that the client is in no way at fault here and indeed has, doubtless as advised by the OP, done the absolutely correct thing when the Swedish employer refunded the tax deducted at source.

The client made returns each year in which a claim to DTR for the Swedish tax actually deducted was included, resulting in a tax reduction. Those returns were correct and the declaration of truth that must accompany a return validly given.

When the employer refunded the tax that they had deducted in error that was not an act which caused the returns to be incorrect. Tax law has though for many years allowed IR and then HMRC to make assessment to recover any DT relief that has become excessive in circumstances which are no fault of the taxpayer’s and involve no type of mistake, innocent, careless, negligent or otherwise.

The current rule allowing for such assessments is in s 134 TIOPA. It used to be a charge under Case VI of Schedule D, and now is a stand alone assessment. It is arguably not a charge to tax, and caters for cases where a s 29 TMA assessment is not possible (given subsections (4) and (5) of that section).

Such an assessment can be made for out of date years but must be made within 6 years of the “material determination” of the revised foreign tax - s 79 TIOPA.

Note that while it is not possible for HMRC to impose penalties for incorrect returns in these circumstances, there is an obligation (dating from, I think, 1998) to notify HMRC of DTR that has become excessive – s 80 TIOPA, and that carries a penalty if either no notice is given or it is given more than 1 year after the “adjustment”. The client here has made that notification.

The excess relief had been paid to HMRC. I take this to be true because the OP has said so and there is no reason to doubt it. If in fact it was paid in response to assessments or there was a contractual settlement then it would be helpful if the OP were to say so, as that *may* change the interest position.

As far as I can tell though, and as I posted originally, neither section 101 and Schedule 53 FA 2009 nor section 86 TMA (if that is still the governing provision for s 134 assessments) cater for interest on tax liabilities that have not been assessed. And I’m inclined to think that in these particular circumstances an assessment under s 134 does not carry interest at all, or if it does then it run from the date given in s 59B(6), 30 days after issue.

That seems to me to be equitable. Charging interest from dates many years ago where there is no blame attachable to the client is wrong and possibly illegal. The OP should strenuously resist any attempt by HMRC to charge it, and ask them for the statutory basis for what they claim.

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By kim.shaw-and-co.com
13th Feb 2024 22:14

richard thomas wrote:

The client made returns each year in which a claim to DTR for the Swedish tax actually deducted was included, resulting in a tax reduction. Those returns were correct and the declaration of truth that must accompany a return validly given.

What I am struggling with (not having taken the time to look up the specific DTR with Sweden) is the fact that clearly no tax should have been deducted at source originally (else there would have been no repayment). The issue is then whether there should have been a claim at all.

There is insufficient detail to ascertain whether some sort of unilateral relief was originally claimed or whether it was credit relief. If the latter it seems to me (and I may be wrong) that it was not correct to make claims for FTCR in the first place. Surely that amounts to an error in a return under basic principles ?

It boils down (as always) to the matter of country of source (or re-source) of the relevant income. If the income was UK source then no claim should have been made, and repayment sought from the Swedish authorities rather than this being something given effect to by the Swedish employer.

The fact the employer repaid the tax because they had deducted it incorrectly does not change the fact that the UK taxpayer should not have claimed relief for an amount of foreign tax that had been incorrectly paid and taken relevant steps to remedy the position. That, surely, is at the heart of s33, TIOPA 2010 ?

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By kim.shaw-and-co.com
13th Feb 2024 23:19

... Would add that if you can show or argue that claims in the Returns have been varied to nil rather than being withdrawn, and that they originally qualified as valid claims within s134 (1) (a) by virtue of relief being available in the other territory in relation to which arrangements were made, then subject to the remaining provisions of that section being met HMRC may have to concede that the adjusting event arose only on repayment by the employer. As such, interest ought not to be in point.

However, in HMRC's shoes I would likely press for an alternative analysis (if I could) that s134 should not apply on grounds that a claim was incorrectly included in Return(s) in respect of foreign tax deducted at source that was properly recoverable from the other tax authority. As such, no claim for relief should have been made and the assessments would then be made within discovery time limits in relation to the amounts returned absent any consideration of the incorrect claims. Those claims would then be treated as invalid claims rather than valid claims, the value of which had been varied to nil.

Care is definitely needed and the case management side is likely important. Check all the documentation received from HMRC and especially any assessment(s) made.

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By richard thomas
14th Feb 2024 20:23

Your first sentence is possibly right for a reason which you have not looked up, namely that Art 14(2) of the Treaty probably denies Sweden taxing rights on the income (on the basis that the client/employee spent ;less than 183 days in Sweden each year). But what we do not know is what Swedish domestic law or Sweden’s interpretation of Chapter 1 Title IV TFEU provides for in relation to deduction by employers of tax from earnings paid to a non-resident performing the duties in Sweden.

I’m inclined to think that in the converse situation a UK employer would err on the side of caution and deduct PAYE.

Another of the facts we do not know is why the change came about. OP says the Swedish Tax authority ruled that the employer was wrong to deduct tax, but was that on the basis of the employer approaching the Skatteverket after many years for a ruling, or the client doing so – maybe after finding out that a fellow non-resident was not suffering tax - or an audit by the Skatteverket or some other reason?

Knowledge of the answer to all or any of these questions may cast doubt on bold assertions.

I do not accept that the issue (last sentence first paragraph) is what you say it is. Nothing in section 18 TIOPA suggests that a claim cannot be made in the circumstances described. Whether the claim is correct is a different issue.

Why was it not also wrong to make a unilateral relief claim if it was wrong to make a DTA based claim? Section 33, your weapon of choice here, applies to both – s 18(1). But I see nothing in sections 9 and 11 TIOPA which rule out a unilateral claim irrespective of the terms of the Treaty. Aozora may be relevant here.

A very good blogger I follow (not on tax) has a response to commenters who in trying to point out errors in the blog, start their comment “Surely ….”. The response is “never risk a surely”. You are saying you are certain that making either type of claim “amounts to an error in a return under basic principles”. Would you care to enlighten us about what the basic principle is in play in these circumstances? And why making a claim for credit for the Swedish tax is an error? And why an error by the taxpayer and not the employer? And while you are at it, why it matters if it was an error? Whether an error or not the position is that the taxpayer has not, except in cash flow terms, benefitted from the employer’s error.

I do not understand your first sentence of your third paragraph. Why does “it” (whatever “it” is) always boil down to the matter of the source country? Why “re-source”? With employment income “source” is not really the determining factor: the place of performing the duties is – see eg s 29 TIOPA and Art 14 UK/Sweden DTA.

Accepting for the moment that Sweden had no taxing rights at any point, I do not see how an employee from whom tax was deducted in a tax year who claims credit in their UK tax return for the year the earnings were paid, makes a culpable error (the only type that matters). You refer to the “heart of section 33” and suggest that it required the taxpayer to have taken “relevant steps to remedy the position”.

Section 33 only requires “reasonable” steps (and this is not playing with words, but referring to the statute rather than making an inaccurate paraphrase). What subsection (3) provides is that one must ask what the person might reasonably be expected to have done to limit the Swedish tax on their income. I do not think it is reasonable to expect a British employee of a Swedish company to query with the employer or with the Skatteverket whether Art 14(2) of the DTA applies to exempt them. The guidance on section 33 in INTM does not suggest so. The SA106 Notes do refer to s 33 by saying:
“Foreign Tax Credit Relief
If you’ve paid tax in another country on your overseas income you can claim Foreign Tax Credit Relief (FTCR) if:
• the foreign income was properly charged under that country’s law, this means that you should have taken reasonable steps, (for example, filing an overseas tax return), to claim all available allowances, relief and exemptions in that country”
That does not seem to me to cover this case. If s 33 does not apply, because reasonable steps were taken – there being no steps which the taxpayer could reasonably have taken – or it simply does not apply because, you might argue, “the credit under section 18(2)” is nil, we are back to square one.

Alternatively one could say that section 33 had been applied by the notification to HMRC and the payment to HMRC of the overclaimed credit.

Having read your post of 22:14 yesterday I ended up wondering what connection this post had to the OP’s question which is about interest.

I was in bed by 23:19 and for various reasons did not see that “and another thing” post until I had already thought about the point of the 22:14 post and formulated the response above. So I hoped for enlightenment, and indeed it does mention interest.

But first it covers what HMRC may or may not do in relation to s 134. But that cannot be in point as any tax that a s 134 assessment might cover has already been paid. Nor can I see that claims in the returns have either been varied or withdrawn – what has happened is that the taxpayer has correctly made a notification under s 80. That does not amount to varying the return (for which the taxpayer is likely to be out of date) or withdrawing the claim.

I cannot believe that you would seriously suggest that, having been paid the tax, HMRC would have sought, off their own bat, to make either s 134 assessments or discovery assessments. They might still, if challenged about interest, realise that if they want to validly charge interest back from previous years they have to actually make discovery assessments – but if capable of being made they would charge no tax.

I would say anyway that discovery assessments for more than 6 years ago cannot be made, nor was there carelessness, or if there was there were special circumstances. And for recent years there is no “loss of tax” to be made good.

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By euanjohn
14th Feb 2024 09:46

Thanks to all for your feedback. I'll review carefully before going back to HMRC.

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By taxdigital
14th Feb 2024 09:59

Now having dropped a WWII grade bomb on here for the respondents to deal with, any chance you let us know whether the client was employed or self-employed in Sweden?

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By euanjohn
14th Feb 2024 10:38

Oh, he was definitely an employee.

I've every confidence that the esteemed correspondents on AWeb have a sufficiently robust metaphorical Anderson shelter to withstand any bombs HMRC can drop on us!

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By taxdigital
14th Feb 2024 21:47

@ richard thomas

I'm a bit curious as to how the Swedish authorities concluded that no tax was due on employment (not self employment as now confirmed by OP) exercised in Sweden.

Tax treaty - Art 14 clearly gives Sweden the taxing rights. The <183 days test is irrelevant as the employer is based in the other territory which is Sweden.

The domestic law as I understand taxes non-residents on income derived from Swedish employments; full stop.

There were some changes to the tax treaty and the domestic Swedish tax laws in the last 10 years but that do not appear to have any consequence as the OP's case is concerned.

Why should we look at unilateral relief when there is relief available under double tax arrangements (s.25)?

I'm confused as how to the 'employment' income is not taxable in Sweden.

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By richard thomas
15th Feb 2024 08:43

The three conditions in Art 14(2) all have to be met to give Sweden taxing rights. If the <183 days test was not met, then the employer test may have been flunked if it turned out that the Swedish employer was paying on behalf of the UK employer.

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Replying to taxdigital:
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By richard thomas
15th Feb 2024 08:48

On reflection not sent - more research required.

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