HMRC demands tax it has no right to
HMRC is writing to taxpayers about corrections it has made to their self-assessed tax for 2016/17 and 2017/18, but in many cases it’s too late for it to collect any extra tax demanded.
Rebecca Cave talks to Tim Good, director of PTP and Absolute Accounting Software about how and why this is happening, and what taxpayers and their advisers should do about it.
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Wrong computations and what HMRC can do
Why is HMRC correcting tax computations for individual taxpayers for years going back to 2016/17?
You’ll recall that the 2016/17 tax return season was a nightmare because so many SA tax returns were excluded from online filing. This was because HMRC struggled to program the self assessment tax calculator in line with the increasingly complicated tax rules.
Some correct tax returns were rejected because the taxpayer’s particular mix of income required the computer to do a calculation it was not capable of. In other cases the tax return was accepted but the HMRC computer produced an incorrect tax computation, leaving the taxpayer paying too much tax, or not enough.
Does HMRC have the power to correct the taxpayer’s SA return, and hence the tax computation, where it is clearly wrong?
HMRC can correct obvious errors in taxpayer’s return and ‘anything else in the return that the officer has reason to believe is incorrect’, but this must be done within nine months of the date on which the particular tax return was delivered to HMRC (TMA 1970 s 9ZB).
2016/17 recovery exercise
In October 2018 my article Return of undead tax computations described HMRC’s exercise to review 30,000 tax calculations for 2016/17. Did HMRC manage to rework all of those 2016/17 tax computations by 31 October 2018?
No it didn’t. In November 2018 HMRC’s software developers support team informed me (and other tax software developers) that the recovery exercise for the 2016/17 returns would begin on 19 November 2018. I understand that up to 40,000 tax computations were recalculated for 2016/17.
If the recovery exercise only began in November 2018 for SA returns which had to be submitted before 31 January 2018, all of those tax return corrections must have been made later than nine months after the submission date. What does that mean for the taxpayers?
Some taxpayers will have tax refunds resulting from that recovery exercise. They won’t have any problem with that.
But an unknown number of the 40,000 cases for 2016/17 resulted in an increase to the original tax which they self-assessed. We must ask under what authority HMRC can correct a self assessment and demand payment of extra tax.
The statutory position is that these “auto corrections” do not appear to be enquiries or discovery assessments: they seem to me to be made under s 9ZB TMA 1970. But if so, they are only valid if made within nine months of the date on which the original return was filed. But they weren’t!
Where a taxpayer has received a demand from HMRC for additional tax for 2016/17 generated by the November 2018 recovery exercise, maybe they should not pay it. If they paid the tax demanded for 2016/17, which was requested in November 2018 or later, the taxpayer should consider asking for their money back.
What about the 2017/18 SA returns, was the whole fiasco repeated?
To a lesser extent, yes. We understand that HMRC started its recovery exercise for the 2017/18 SA returns in October 2019. It issued around 15,000 letters containing revised tax calculations for 2017/18, all dated 28 October 2019.
So this recovery exercise was also too late for 2017/18?
Indeed, unless the 2017/18 return was filed on 29, 30 or 31 January 2019 or later, any additional tax demanded following the 2017/18 recovery exercise is not payable.
How much tax is at stake?
The amount of underpayment depends on which exclusions were in play. HMRC has helpfully provided these examples for 2017/18:
- Exclusion 81: maximum underpaid - £1,100
- Exclusion 82: maximum underpaid - £15,075
- Exclusion 83: example of tax underpaid - £23,209.80
- Exclusion 87: example of tax underpaid - £24,000
- Exclusion 93: example of tax underpaid - £200
- Exclusion 94: maximum underpaid - £400
That’s a lot of tax. Could HMRC raise a formal assessment to recover the tax it now thinks is due for 2016/17 or 2017/18, if the taxpayer refuses to pay?
To raise an assessment HMRC needs to open an enquiry. The time limit for opening an enquiry into 2017/18 tax returns ran out on 31 January 2020. Enquiries into 2016/17 returns had to be opened by 31 January 2019 at the very latest.
HMRC officers regularly miss the enquiry deadlines these days. They simply raise discovery assessments instead, where the time limit is four years, or six years in cases of carelessness. Won’t discovery assessments be used to collect the underpaid tax?
The tax inspector would have to be quite imaginative to ‘discover’ an error which was created by the HMRC computer. I can’t see a tribunal judge agreeing that a discovery assessment was valid in such circumstances.