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Whither self assessment? by Rebecca Benneyworth

18th Jan 2009
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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?


Replies (10)

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By Anonymous
23rd Jan 2009 12:12

Jon, do you have a link for the above? Thanks.

LATER - got it now. thanks Jon.

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By Accounting WEB
23rd Jan 2009 17:09

Tax Being Given up,
Having just checked HMRC have removed the guidance and have replaced it with PAYE 95045 to 95085.

The bit especially relevant is the 'reasonable belief' section 95080 and the flow chart on the page after which sets out the process.

I hope this helps.


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By AnonymousUser
21st Jan 2009 17:32

Don't know if it is entirely on all fours with this thread
but we have a case where a pensioner is entitled to MCA.
Said pensioner is a taxpayer, all circumstances taken in the round, but no tax is being collected under PAYE because the PAYE code includes the full MCA without taking into account the restriction of relief to 10%. Left unadjusted this would give rise to an underpayment of tax by the year end. We suggested halving the MCA increment to the code, which would collect the right amount of tax, but operator at HMRC said that this was not possible. OK, there may be other ways around it, but sheesh!

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By Accounting WEB
21st Jan 2009 15:42

Coding Notices and Chocolate Fireguards
I can certainly agree with the comments concerning the validity of the coding notices. I was asked by a family friend to look at his last four years of returns as HMRC had just asked him for £4k in extra tax.

I re-calculated the numbers and saw that his coding notice only had basic rate tax being due on someone blatantly earning higher rate as his p60 alone had him over the threshold and they knew of his pension drawings.

I managed to get the Rev to drop the claim under EP6601, whereby HMRC have to give up a claim if they failed to make use of information and that the taxpayer reasonably believed everything was in order.

The worrying thing is not the issue of the claim, thankfully my friend had someone he could go to, the problem is the fact that HMRC is taking 'fact' from a form far from reliable.

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21st Jan 2009 13:15

It would help if they used common sense
I have a case that has arisen today in connection with this. I have a client who's Return has been amended to "correct" the pension received to match the PAYE Coding Notice, although in this case both they and I have been alerted to the amendment and it was not carried out unilaterally.

Upon ringing the Tax Office concerned I was taken through various security questions, one of which was the client's date of death. I was subsequently asked why I felt that the amendment was incorrect as the pension included in the Coding was higher than that on the Return at which point I referred them to their security question and advised them that the pension is not generally paid after a taxpayer has died! The Revenue did not seem to have any automatic suggestions as to how I explain to my client's widow that I am sorry the Revenue amended the Return incorrectly but they inadvertently overlooked your husband's death.

A small amount of common sense by the processor would have saved me a 15 minute telephone call at a time when I do not have 15 minutes to spare.

Are such situations going to be looked at in detail by someone with a modicum of intelligence when the decision to change the Return becomes unilateral or will the widows/widowers of unrepresented taxpayers be left with excessive tax bills due to the inadequacies of the automated system?

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By Anonymous
20th Jan 2009 11:26

This is a good thing, isn't it ?
The change in the law is a small Revenue move away from a Self Assessment ethos. These examples show where this move is being felt first - pensioners. I've been having a think about this and believe it is to be encouraged, because PAYE is very rarely operated on NIBs.

Nothing could show better how some in the Revenue are thinking than the failure to issue notifications. I wouldn't be surprised if there is a small battle going on somewhere in Whitehall.

The Revenue may argue that the tax bill or code notice counts as notification of amendment/correction, but obviously there would have to be a better way of communicating such.

I too would be very annoyed if I'd already prepared and submitted a Return, but from :

"anything else ..... that the officer has reason to believe is incorrect”

its not a giant step to issuing an assessment in the first place. If HMRC carry on like this then pensioners could be relieved from an onerous duty which, it is debateable, should never have been foisted on them.

Just think, we're already checking and dealing with Code Notices, so why not go the whole hog and just issue a Revenue declaration for signature or taxpayer amendment. It'd be much simpler all round. I'm sure that is a long way off, but I don't mind the Revenue sailing blithely on in that direction.

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By AnonymousUser
19th Jan 2009 15:29

On-line return history needed
HMRC could solve some of the problems mentioned here if their systems allowed the operator to view the history of a return. I have had a case where we amended a return after the enquiry window had closed. Although only couple of entries were changed and the tax remained the same, HMRC overwrote the submission date with the date the amendment was made, and tried to start an enquiry into the whole return. It was clear when I phoned them that the person I was speaking to had no way of telling that the record had been changed, let alone be able to see the original details. My suggestion that the history must be available to their IT people, so they could look it up, was met with a flat denial! Fortunately the return acknowledgement saved the day.

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By martinfoley07
19th Jan 2009 14:14

I agree .......
....with Stuart that it's very odd HMRC have decided to alight on state benefits included in the PAYE notice of coding as their start into the brave new world of auto-processing and changing taxpayer returns ( whether paper or online).
The percentage of these that are accurate for the year in retrospect would be an interesting statistic ( that we will never know) but experience shows that very many are not. Frightening.

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By martinfoley07
19th Jan 2009 14:05

It's not merely online.......
....Robert. the case I had was a paper return which was amended without the taxpayer being notified.

I agree there is a general issue about various online matters.
And a vital subset of that must be a proper system of notifcation to taxpayer about any unilateral changes (including deletions !! But was that not deemed to be a "gliche"?)
As HMRC is loathe to use email for security reasons (and I don't believe we are anywhere near a time when HMRC is likely to widely use email for agent interaction let alone taxpayer interaction), this impliesa very substantially improved interface between HMRC and taxpayer/agent.

But the taxpayer notification point re unilateral changes by HMRC to "self-assessed" tax returns arises irrespective of online or paper.

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By martinfoley07
18th Jan 2009 22:12

...pleased to hear......
....... that it is unlawful for HMRC to unilaterally amend a self-assessment return without notifying the taxpayer, Rebecca.
That's very clear and helpful. And at least that means we do not have to argue that it is "merely" unacceptable !!!

So the next steps
(i) ascertain how on earth HMRC came to set up a clearly unlawful process?
This is hardly complex. It is really straightforward and simple. They set up a new process to amend rafts of tax returns without any attempt at setting up a parallel process to notify taxpayers affected.
(ii) when are HMRC going to stop / change this ?

p.s. minor quibble - in your opener
"Can they do this? he asked"
should read
"Can they do this without notifying the taxpayer he asked".
The omitted words are (for me) the crucial bit of the whole mess.
I was not asking if HMRC has the right to amend a tax return unilaterally. Not only can they do so, I agree that they should be able to do so under the conditions of apparent error etc, to obviate the need for formal enquiry etc. Should mean saving time and money and unnecesary drawn-out procedures for all concerned (HMRC, taxpayer, agent) in many, many cases.
Nor do I consider the new extension of their powers to unilaterally amend the return to be
disproportionate in principle.
But very grateful for the answer about notification and the source for it.

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