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Error or mistake – Can you change your return when HMRC change their guidance? By Nichola Ross Martin

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26th Jan 2007
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You cannot claim error or mistake relief if you completed your return in accordance with a “practice generally prevailing” (PGP) at the time. This article looks at PGP in terms of a topical issue, and argues that we do need this term properly defined in the new taxes management act.

In case you have just come back from Mars (or more likely have just been too busy with SA returns), in December, HMRC published for the first time, in one place comprehensive guidance as to what a self-employed person may claim against tax when using his or her home for business purposes.

As a result of the new guidance, I wager that many people will now “discover” that they have not been claiming all that they are entitled when they use their home for their business. Some people may not realise that they can claim home repairs as well as mortgage interest and council tax. As updated expense claims of this nature may be material, some taxpayers will be keen to revise SA returns for earlier years.

Whilst it is unlikely that anyone will try and correct a return to add an £104 expense, if you paid for a new roof, guttering and windows and had an exterior paint job on your home in say 2003/04 and use 1/8th of your home for business, you might have a sizeable error or mistake claim in the making.

If you are quick off the mark, when you read this, you could just manage to revise your 2004/05 return in normal time. You will have until 31st January 2008 to adjust your 2005/06 return. If you are out of time for the earlier year or previous ones, you will have to rely on s.33 TMA 1970 and make a claim for error or mistake relief. The only problem with this as a plan is that you may run up against the defence of “practice generally prevailing” (PGP).

S. 33 TMA 1970 gives the taxpayer the right to apply for relief if an assessment is excessive by reason of some error or mistake in a return. He has five years from the filing deadline to do so, and HMRC must give relief as is just and reasonable. However, there are two exceptions to this:

(2A) No relief shall be given under this section in respect of:
(a) an error or mistake as to the basis on which the liability of the claimant ought to have been computed where the return was in fact made on the basis or in accordance with the practice generally prevailing at the time when it was made; or
(b) an error or mistake in a claim which is included in the return.

So, per (a) above, if you have relied on a prevailing practice of one sort or another that you cannot try and change the return after the event.

(b) above, concerns claims and this part is outside the scope of this article, but I have looked at it in term of losses and capital allowances in two previous features which are listed at the bottom...

“Practice generally prevailing” (PGP)
PGP is not defined in the taxes management act, it seems to be a matter of fact. It is the "zeitgeist" but there are many practices which affect the figures that go into a tax return; from GAAP to established working practices, to extra-statutory concessionary practices, to decisions set by the courts. Ultimately PGP is set (and re-set) by the decisions of the courts, but otherwise, just whose practice is the one that is said to prevail?

PGP cases which have tended to come in front of the courts have examined accounting practices, taxpayer motive in deciding to make a claim or not and when an assessment is excessive due to a mistake in a tax enquiry. Errors or mistakes do come in different shapes and sizes; the recent Deutsche Morgan Grenfell Group cases (ACT and international subsidiaries) considered what happens when companies pay tax which is subsequently not due as HMRC have made mistake of law. S.33 was not argued in the end, the companies found relief for mistake of law and “unjust enrichment”.

A search through HMRC’s published manuals on the topic at the moment takes you to the epitaph of the Inspectors’ Manual (this “old timer” was withdrawn from service in December). It informs us that the chapter on error or mistake relief is deleted. We are informed that "revised and updated guidance will appear in a new Claims Manual". This sounds interesting, but it has not yet appeared online.

The old chapter explained:

" The question of whether there is a "practice generally prevailing" is not an easy one to answer as there has to be a general acceptance of the practice by the Revenue, taxpayers and agents throughout the UK. Consequently, a knowledge of what is happening around the country on the particular point at issue is needed before a decision can be taken on this aspect."

This definition crops up in other manuals too, but the Self Assessment Legal Framework manual has some different ideas. SALF206 says: “A taxpayer cannot claim error or mistake relief simply because HMRC announce that they have changed their practice in relation to the treatment of some particular item.”

It might be prudent to explore the reasons why HMRC might have had to change their practice before accepting that this statement is the gospel truth. A mistake of law clearly would not preclude error or mistake.

The published comments made on the subject of PGP in the initial consultation workshops for the new taxes act highlight some additional problems:

"There is a need for clarity over what PGP actually means. The delegates suggested that the ex-IR view is that it meant practice generally accepted by IR. If it were clearer there might be a case for it to apply to all direct tax claims, not just error/mistake claims. But underlying practice is not always clear e.g. in the case of fast moving accounting standards where there is also accountancy practice involved. And there is no remedy if the PGP is wrong.

Conceptually PGP could apply to VAT although it may not be permissible under EU law. There would be an extra dimension – would it be the overseas prevailing practice that was relevant? If so, it would be necessary to take account of the time it takes for practice to be disseminated in multi-national companies.”

I will leave VAT and the topic of EU law for another day (!) and focus on the “need for clarity” instead.

Working out if a practice is “generally accepted”
This (rather well trodden example) serves to illustrate one side of the problem: HMRC, some think, revised their interpretation on s 660A ICTA 1988 (now included in Chapter 5 ITEPA 2005) at some stage in the late 1990s. However, they had not trained all their inspectors accordingly which is why so many investigations were conducted prior to 2003 with no reference to this piece of legislation.
In April 2003 their first draft of guidance on how the settlement provisions might affect business was placed in the public domain. Prior to 2003 HMRC had opened investigations on the basis of this revised interpretation. S.29 TMA 1970 (discovery provisions) were then used to re-assess earlier years. S.29 mirrors s.33 from HMRC’s perspective, and bewilderingly, some accountants sat back and accepted these “discoveries” being presumably coerced into thinking that the Revenue’s views were PGP. HMRC did try this in the case of Jones v. Garnett, but were too late to have it raised in court and so it escaped as “a technicality”. This was lucky for the Jones, but annoying for those wanting to test out PGP.

More recently we have had the UITF 40; it is clear that no one understood its ramifications at the start. At one stage the ACCA were giving different advice than the ICAEW. HMRC issued a helpsheet that was actually wrong. Even when we thought the dust had settled, it was then discovered that the AAT and ATT were issuing differing advice from the other professional bodies. I wonder how many people had submitted returns which could now be deemed incorrect, and how could anyone work out what practice prevailed?

Interpretation of use of home claims and PGP
It remains to be seen whether HMRC would try and block an error or mistake claim for amended “use of home” expenses on the grounds that they have changed their guidance (per SALF206). As far as I can see this is the first time that they have ever produced full guidance on this topic, and so it cannot be claimed as “updated”. I do not know what people have and have not been claiming over the years for “use of home” either. I did chat it over with a fellow accountant and neither of us could think of a single time when an officer ever queried a "Use of home" claim on a tax return or during an enquiry. On balance, it might be quite hard to work out what practice has been the prevailing one in the case of this particular expense.

Conclusion
All things considered, and putting the “use of home” question slightly to one side, it disturbs me that some of our tax legislation is now so complex that even the experts cannot agree with each other what does what and why - take s.447 ITEPA 2003, for instance. In some cases it is very difficult to identify a correct practice, let alone try and ascertain which one prevails (UITF 40 / the settlement provisions). Add the international aspect (Deutsche Morgan Grenfell case) and you have total pandemonium. It is clear that paragraphs like SALF206 seem biased, but they are written by HMRC for HMRC. We do not know whether new Claims Manual is going to be of the same sentiment, or more like the old Inspector’s Manual. Without a shadow of doubt, it would definitely help those struggling with this if the new taxes management act could attemtp to define PGP more clearly.

Error or mistake and partnership losses

Error or mistake and capital allowances

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Replies (6)

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By Kazfoster1
30th Jan 2007 11:22

CGT Implications??
Has anyone any thoughts on the CGT implications of allocating a part of the main residence for business use? My understanding was that capital gains then accrue on that part of the house on sale?

We have always put in a "general" but small allowance to avoid this problem.

Perhaps the change in guidance is a bit of a trap?

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By User deleted
30th Jan 2007 12:56

Karen
If you go back to the original article on the working from home guidance, which is here you can see the comments about CGT.

It will really only hit if part of the home is used exclusively for business purposes, but I might also be concerned if the business was using a substantial portion of the home.

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By barryhallam
29th Jan 2007 13:53

Mansworth v Jelley

I seem to remember this problem cropping up in 2003 regarding claiming capital losses for "closed" years following the "Jelley" case.

As I recall an article in Taxation by Sue McDonald (8 May 2003) persuaded the Revenue to concede that when a claim had yet to be made a s33 claim was not relevant but a claim under s42(9) could be made within the normal time limits. S42 does NOT include any reference to PGP

Could this be applied to claims for expenditure relating to use of home as office which were not claimed originally by making a new claim? In the next day or so for 2000/2001!!

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By AnonymousUser
30th Jan 2007 10:13

Ooops! Our mistake
Many thanks for this warning. As you quite rightly predict, we were one of the many who, when we read the earlier article, realised we hadn't been claiming any tax relief for use of a dedicated office at home (which is also the registered address and main office for one of our companies) for the last three years.... Naturally, we were straight on the phone to the local tax office. They were charming. No problem just write in and set out the estimated costs and they would adjust our personal tax assessment accordingly.... I guess we will find out if that was just a front soon!

Presumably, though, since we hadn't claimed at all, the PGP defence looks a bit shaky??

Regards - and keep up the good work. This web site is invaluable to a semi-skilled practitioner like myself.

John Cooper
Profile International Consultancies

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By User deleted
05th Feb 2007 16:34

Will this affect Artic Systems?
If us accountants have prepared Tax Returns based on the guidance given at the time, then the ruling is over turned?

If it takes so long for the judgement to come through, that those years have passed, will they apply the same principles?

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By User deleted
07th Feb 2007 13:41

HI Richard
Hopefully you have prepared your tax returns in accordance with the courts' ruling and not HMRC? The courts have the final say.

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