Martin Foley has been struggling to resolve a case in which HMRC amended a client’s return unilaterally. Can they do this? he has asked. I have taken a detailed look at the law to find out.
A number of members had complained about tax returns which were filed showing the correct figure for state pension income for the taxpayer, but which were mysteriously amended after filing. Surely we can’t have a system under which taxpayers are responsible in law for making a return which the law allows HMRC to amend unilaterally? Particularly if the systems are not robust enough to prevent returns from being amended incorrectly.
The problem relates to state pension income, and Martin finally unearthed the mechanism producing this outcome when he received a letter of apology in his client’s case. The following quote sums up the process neatly.
"Our new system automatically checks whether any deduction is included in a customer's PAYE tax code for National Insurance Benefits. If a figure is included in the tax code, then it is automatically included when the Tax Return is being processed. This entry is supposed to be checked and adjusted if the customer has included an entry at Box xx"
and goes on to say "unfortunately this was not corrected when xxxxx's Tax Return was dealt with".
The legal position differs for current returns from future years because the law affecting this aspect of self assessment changed in Finance Act 2008 – although the new legislation has not yet commenced. The position up to and including 2008 returns is that once a taxpayer has made a return, HMRC may amend the return after an enquiry or when loss of tax is discovered (neither of which are in point here) or under Section 9ZB TMA 1970 may amend a return “so as to correct obvious errors or omissions in the return (whether errors of principle, arithmetical mistakes or otherwise).” So amending a return is possible if the return contains an obvious error or omission. However, S9ZB (2) requires that a correction under this section is made by notice to the person whose return it is.
So if the new process Martin has unearthed and described above does not also provide that a notice of amendment is issued to the taxpayer (and/or his agent) which then permits the taxpayer 30 days to reject the correction, then the process is incorrect in law and the corrections so made are unlawful. This is the case even when the taxpayer has omitted to report any pension income on the return, that is, has made an obvious omission. I would challenge any automated process which relies on operator intervention to prevent a returned amount from being overwritten – the process design itself is based on unsound legal footing.
This leaves aside the fact that the data used to overwrite the amounts returned (whether nil or not) is not of the highest quality. Taking the adjustment from the PAYE notice of coding pre supposes that these are correct. I wonder if that is a view that many accountants would agree with. I accept that we are considering only one item in the notice of coding, but am concerned that this data is not sufficiently reliable to form a basis of amendments to a self assessment. It smacks a little of the “system” deciding what pension income you have and collecting tax through PAYE accordingly, and then altering your tax return so that is agrees with the tax already collected. It all sounds a bit Catch 22 to me.
So Martin’s question does have a clear answer for this and all previous self assessment years. No, the tax authority cannot amend a return without notifying the taxpayer that it has done so.
But what of the future? Section 119 of Finance Act 2008 amended Section 9ZB of TMA, by adding “or anything else in the return that the officer has reason to believe is incorrect in the light of information available to the officer” at the end of the sentence quoted above. This extends the right to amend a return to allow HMRC to alter a return unilaterally to reflect information in their possession. So where HMRC holds pension information about a taxpayer and a different amount is included on the return by the taxpayer, the new style Section 9ZB allows HMRC to amend the return accordingly. This change has not yet commenced, as it needs a Treasury Order to set it running, but it is likely that it will come into force from April 2009, as part of the new compliance interventions. But Subsection 2 remains unchanged. So it is still the case that HMRC must notify the taxpayer who has the right to reject the amendment.
In summary, I think we have two issues here. The first is the legality of the new process, and clearly the law is not being complied with in these cases (whether the return includes an amount for state pension or not). This should be looked into with all urgency. The second issue is the design of a process, which is fraught with danger. Relying on operator intervention to over-ride an automated process which is using less than cast-iron data is ultimately likely to create more (not less) work. Perhaps the number of cases where the pension data is incorrect is very small, but it leaves me very concerned for the unrepresented taxpayer. Advisers will no doubt be billing HMRC for their wasted time, but how will the OAP know that his return was right in the first place?