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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.

11th Feb 2020
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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. 

2017/18 recovery

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. 

Replies (23)

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By Ajtms
12th Feb 2020 11:22

It is reassuring that one of my clients is not alone in the fight to force HMRC to comply with the law. We electronically lodged our client's 2017/2018 return on 15 Oct 2018 and at the time there were no warnings on the software that this might be an "excluded case"Happily the return was accepted by HMRC. Eventually, we found out it was an excluded case. Neither our client or ourselves received anything more from HMRC until their Debt Management Departments's rude and threatening letter dated 29 March 2019 telling the taxpayer to pay approx £1,200 immediately. Our client duly paid. Please note that to this day, HMRC have never issued a corrective notice within the 9 month window and naturally the 12 month enquiry window has passed too. We made a formal complaint in writing to HMRC on 23 April 2019 and despite reminders by telephone and letter there has been no reply after over 9 months. By telephone I have though asked for a copy of the correction notice that neither my client or ourselves received, but they tell me that no such notice is on their computer. Upon threatening referral to the Ombudsman, HMRC say that they will reply soon, but after 9 months waiting for a reply I don't know what they mean by "soon." Thanks for the article Rebecca

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By Vallery Lee
12th Feb 2020 12:12

Aitms. Disgraceful behaviour on the part of HMRC. I doubt that the word "sorry" was heard in the telephone conversations - there will certainly be no written apology.
Let's hope that all the people that were coerced into paying more tax get refunds + interest

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By G Webber CTA
12th Feb 2020 12:28

This is shameful.

But ...

This sort of behaviour being perpetrated against my client group has become standard operating procedure for HMRC.

Beware, if we - as advisers - tolerate this, HMRC will never learn where their boundaries are.

Sounds like we should treat them as three year olds?

Yes we should when they behave like that.

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By johnjenkins
12th Feb 2020 14:45

I'm not quite sure I understand the problem. If a tax return was submitted then the client will know what tax to pay and when to pay it. If there is a refund due then that should be automatically be repaid. If, for some reason HMRC are altering the self assessment figures to their own "pie in the sky" figures, then, obviously you don't pay.

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Replying to johnjenkins:
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By Ajtms
12th Feb 2020 15:14

The problem is that no matter what software is used to prepare the return, the programmers are forced to use HMRC's calculation even where HMRC's calculation is known to be incorrect. If the return is electronically submitted with differing figures to HMRC's calculation then HMRC's computer will reject the return. This is why all tax software programmers are forced to use HMRC's calculation and cannot use anything different. At the time I submitted my client's return the liability showing was £1,200 less than what a manual calculation will NOW show it to be. As there were no warnings on the system, we had no way of knowing that HMRC's calculations (embedded in the software) were showing a liability of £1,200 less than it should be. Client therefore paid the tax as calculated by the software and this then showed up on HMRC's statement of account. As HMRC did not amend the return within 9 months of the submission, their actions in calling in the debt collectors to collect the £1,200 at a later date was unlawful.

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Replying to Ajtms:
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By johnjenkins
13th Feb 2020 09:28

Again I'm a little gobsmacked by this. We do a self assessment tax return and duly print out an SA302 for the client. Obviously we check to make sure it's correct. Again if HMRC choose to use their own inaccurate figures we ignore them. The client always knows what they have to pay. To me telling the client they don't have to pay the correct figure just because HMRC says so (for whatever reason) is ludicrous. Or am I missing something here?

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Replying to johnjenkins:
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By Ajtms
13th Feb 2020 10:09

Unfortunately, in common with most tax agents, we do not have the time to prepare our own manual tax calculation (outside the program) just to check what the computer program says. We therefore print out the SA302 and send it to the client with advice of what to pay and when. If you or I disagree with the SA302 then as this cannot be changed within the program we are then forced to file a paper return (at extra unnecessary cost) as HMRC's receiving computer would reject an electronic submission showing a liability at variance to their calculation. My client paid exactly what the SA302 said was due and I do not believe you would have seen anything wrong with the SA302 without spending a few hours to recreate it on a spreadsheet. What is the point in using expensive tax return production software to make the calculation if every time we then have to spend hours checking it by means of a spreadsheet. My clients would not want to pay for this duplicated work which in the majority of cases would be unnecessary. It is after all, in only a handful of cases where the SA302's are wrong and until HMRC publishes its exception list (which they had not done at the time the return was lodged) we have no means of identifying these erroneous SA302 cases. I do not think it unreasonable for tax agents to use the SA302 as provided without spending hours independently checking it first. In my book, when the SA302 is wrong it is HMRC's fault as they are the ones that wrote the calculation logic and imposed it upon all tax software producers to embed in their programs.

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Replying to Ajtms:
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By johnjenkins
13th Feb 2020 10:38

An SA302 can be prepared on a spreadsheet in 5 minutes, then just change the figures for the particular client. It really isn't rocket science, and surely isn't that part of an Accountants job, to tell the client what their tax bill actually is.

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Replying to johnjenkins:
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By Ajtms
13th Feb 2020 12:27

Physically impossible. My client's return includes every single available supplementary page (except clergyman) and the tax liability from over 20 differing sources of income plus complex outgoings is well over £100,000. If you have a spreadsheet that can cater for that which is not based upon HMRC's calculation then I am sure that every accountant would be wanting a copy of the template especially as on the lower income cases we now have to look into situations of allocating personal allowances to a particular source of income to reduce the liability compared to just setting allowances against earned income.
Please publish your spreadsheet template so we can all see if it truly overcomes every single one of the Exceptions that HMRC have now published. I have the good fortune to know a highly experienced computer programmer and have previously been told that it would take a minimum of 2 weeks full time work to create a spreadsheet template to overcome every one of HMRC's Exception errors. If it only takes 5 minutes to do, how come after 3 years HMRC still haven't managed to correct their errors. Does your spreadsheet really cater for situations where dividend income needs to be taxed at 40% or 45% when the standard rates are 7.5%, 32.5% and 38.1%? I suspect not.
Are you not missing the whole point of the article which is about HMRC trying to collect tax (using debt collectors in my clients case) when they are outside of the statutory time limits to make an assessment. At the end of the day my client should receive a refund of the £1,200 un-assessed tax compared to one of your clients where you say you would have identified the highly complex error in 5 minutes and told the client that he would have to pay £1,200 more than HMRC initially wanted and then had to go to the trouble of lodging a paper return. Having talked to hundreds of accountants over the last 40 years I don't know of one who would want their client to pay more tax than that assessed by HMRC on their SA302 calculation. They would advise the client that more may be payable if HMRC make an assessment in a timely way.

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Replying to Ajtms:
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By johnjenkins
13th Feb 2020 13:47

I fully understand your point and the fact that HMRC are out of time, however the basic premise that you advise your client of his tax liability and when it is due is what we Accountants do. What is an SA302???????????? if not a glorified spreadsheet. You have basically answered your own question. The client should be made aware what their tax liability is, not what it might be on an HMRC calculation. You advise the client what they have to pay, they pay, no problem.
I use Keytime and the sa302 always agrees with my own spreadsheet calculation. Even though HMRC will send an amended assessment (perhaps the client is still paying class 2 nic on DD). The tax return has never been rejected. Where they did not accept certain returns, the client was informed of the correct figure to pay.

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Replying to johnjenkins:
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By Ajtms
13th Feb 2020 14:35

The problem is that there is no spreadsheet template in existence that correctly overcomes every single HMRC exception error so how can we check HMRC's SA302's against something that does not exist! As mentioned, with the complexity of the client that I have, if an experienced computer programmer would take 2 weeks to design a template then it would take an accountant even longer. I have been talking about a client that has every conceivable source of income and every conceivable outgoing. I can only presume you are talking about straightforward cases that have never been on HMRC's Exception lists. The fact that HMRC have never electronically rejected one of your returns proves that they are straightforward cases that have never been on HMRC's Exception lists. Class 2 NIC problems really don't fall into the complex exception category. I look forward to you publishing your spreadsheet template so that I can test it against all of HMRC's Exception errors on my clients with highly complex tax positions.

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Replying to Ajtms:
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By johnjenkins
13th Feb 2020 15:20

Why are you bothering to check HMRC's SA302. You should be aware of what the client's tax liability is. It doesn't matter that the figures have to be juggled to get the return to go through. It looks as though (I'm not having a go) you rely too much on what HMRC are saying and not what you should be telling the client. Self Assessment is just that. Client or an agent works out their tax bill and it is paid by 31st January. I don't see how an HMRC SA302 comes into the equation, unless, of course, someone has said "hang on we could get away with paying less tax ere". (I'm not saying that is the case with yourselves).

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Replying to johnjenkins:
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By Ajtms
13th Feb 2020 15:58

I don't check SA302's unless HMRC respond with a different figure or unless HMRC electronically reject the return. You say I should know what the client's tax liability is, but you don't say how I can calculate this when there is no spreadsheet template in the country that deals with HMRC's Exception Errors. In the absence of this impossibility I will continue to rely upon the SA302 which the system creates. I am not going to spend a whole month or more trying to create a spreadsheet that works when one year later it would need redesigning again. Simply changing allowances and tax rates does not work as that is what HMRC do and they create more Exception Errors in the process. I really don't like your suggestion of "juggling figures to get the return through." My clients returns are ultra squeaky clean and I am not going to falsify their income or expenditure just to show a higher tax liability than that showing on the SA302. As you should know, it is not possible to show a higher tax liability that the return software suggests without falsely showing a higher income or lower outgoing. My clients returns always have been and always will be ultra squeaky clean and I will not juggle with the contents in the way that you suggest. I have asked you to publish your spreadsheet so that we can all check it out. It obviously is the only spreadsheet in the country that does work and the whole profession and indeed HMRC would welcome a copy of it. As you know HMRC have been working on this continuously for 3 years and still cannot get it right.

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Replying to Ajtms:
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By johnjenkins
14th Feb 2020 09:26

The crux of the matter is that the client is paying you in part for telling them what their tax liability is, not what it comes out in a return which can only be submitted with or without exception errors. My point about "juggling figures" is that once the return has been submitted you can always do an amendment once HMRC have sorted their problems out. As I said before the problem seems to be that you can't work out your clients' tax liabilities without the use of the tax software.
As for publishing my spreadsheet - come on. If I did that you lot would be as good as me. lol.
I don't actually need a spreadsheet to work out the tax liability of complicated income earners.
Maybe I have too higher expectations of what an Accountant is.

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Replying to johnjenkins:
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By Ajtms
14th Feb 2020 12:12

Unfortunately it is not possible to lodge an electronic amendment to a case where there is an HMRC exception as HMRC never fix their exception errors in the year that they arise. All HMRC aim to do is to fix the error for the following tax year and they don't always even manage to do that. For at least 10 of my cases a year, there is a warning on the system to say that that the client's highly unusual pattern of data falls into an HMRC exception and the system tells me that I have to lodge a paper return to avoid rejection. It also tells me to make a manual calculation to over-ride HMRC's calculation. With the warning on the system, I naturally follow the advice, prepare a manual calculation and lodge the return in paper format with a "reasonable excuse" claim when lodged after 31 Oct. In all these circumstances HMRC have never fixed the error for the tax year and so no electronic amendment is possible. In the case I have been talking about, there was no warning on the system for at the time of submission, HMRC had not published their exception error and the return was lodged electronically and the client paid the tax per the system's SA302. I really don't see anything wrong with that. When somebody has a £170,000 tax liability arising from over 20 sources of income, a £1,200 difference is impossible to see without making a long laborious calculation. I have in the past downloaded various online calculators and spreadsheets, but they all come up identical to HMRC's SA302 so I remain in search of a calculator that will give a 100% accurate answer. As HMRC with teams of programmers working full time for 3 years cannot get their calculations right, I cannot be expected to produce something better. According to a genius computer programmer that I know, he says that many people have tried to sue computer programmers for the hassle caused by bugs in their system, but nobody has ever been successful as courts understand that it is impossible to have a perfect program. A basic tax spreadsheet will work 999 times out of 1,000, but there will always be an unusual pattern of data once in a while that causes it to fail. This is a bug that when fixed will then cause another bug to materialise.

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Replying to Ajtms:
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By johnjenkins
14th Feb 2020 12:44

As I said, I fully understand your problem but that doesn't exonerate you from not knowing exactly what the clients' tax liability is and informing them of it. You cannot rely on software alone. Buggeration, yes, but don't drop down to HMRC's standards.
With spreadsheets, the idea is to keep it simple and don't amalgamate too many at once. Too many formulae will rock the boat.

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By unclejoe
13th Feb 2020 11:55

I pay tax under PAYE. I received a letter saying that they were revising my coding to account for unpaid tax for previous years . Hmm! I check my tax and I believe it to be correct for all previous years. The letter did not say what year or why tax was underpaid. I have tried repeatedly to get this sorted out but they just keep saying that they they will investigate it - but then do nothing. In the meantime I am losing over £100/month with no choice not to pay. With the budget coming up my advice to the chancellor is to completely review the tax system with a view to simplifying things. If it is too complicated to program, it implies that it is too complicated for anyone to properly understand. Simpler tax - everyone benefits, not least HMRC who would have less problems and more staff time to address those that remain.

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By coolmanwithbeard
13th Feb 2020 15:17

Interestingly I have had a PA302 Simple Assessment (S59BA TMA 70) today for 2017/18 for a client. It is demanding £62.10 - goodness knows why - I checked the "Explanation" which said "We have worked out you have paid too little tax" which would appear to be a statement of the bl*****g obvious. Except that we send in a SA ITR on 17/12/18 with a much higher figure on it!

I suppose I have to appeal and contact the client and who will pay for my time?

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Replying to coolmanwithbeard:
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By johnjenkins
13th Feb 2020 15:25

In a couple of cases we have put in (on instructions from client) estimated figures and ticked the box. Before we have had time to send in an amended return, HMRC have sent out a notice stating that 2019 is the last time the client has to do a return. Now I could leave it at that but I'm sure once the amended return goes in we will get the normal, your client has to do a self assessment for 2019/20 letter. HMRC is a joke and not fit for purpose.

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Replying to coolmanwithbeard:
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By Ajtms
13th Feb 2020 16:53

The fact that you sent in a return over a year ago means that HMRC are out of date for normal assessing. They may have grounds for a discovery assessment, but a PA302 is not a discovery assessment.
You need to lodge a complaint with HMRC and then you can claim compensation for your client to cover your fees

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Replying to coolmanwithbeard:
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By Not Anonymous
14th Feb 2020 19:20

coolmanwithbeard wrote:

Interestingly I have had a PA302 Simple Assessment (S59BA TMA 70) today for 2017/18 for a client. It is demanding £62.10 - goodness knows why - I checked the "Explanation" which said "We have worked out you have paid too little tax" which would appear to be a statement of the bl*****g obvious. Except that we send in a SA ITR on 17/12/18 with a much higher figure on it!

I suppose I have to appeal and contact the client and who will pay for my time?

It is one or the other, Self Assessment or Simple Assessment. No need to "appeal" anything, you should be able to just ask HMRC to withdraw the PA302 notice as the Self Assessment takes precedence.

The client would have to pay you for your time. If you choose to charge them. But if HMRC have made an error then your client may be able to get that back from HMRC.

Whether there is an error in the context of redress might depend on what you did in the first place. Did you file an unsolicited return or was a return/notice to file issued?

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Morph
By kevinringer
19th Feb 2020 12:10

Two clients received a 2016-17 SA302MM on 20/11/18. The Tax Returns had been submitted on 07/08/17. They were initially rejected because they were ID50 exclusion cases. HMRC's in-year fix permitted the Tax Returns to be successfully filed on 27/10/17. I objected to the SA302MM under s9ZB TMA 1970 on the grounds the deadline for correction was 27/07/18. I sent my objection to HMRC on 19/12/18. HMRC didn't reply until 07/11/19. HMRC disagreed with me. I sent a complaint 13/11/19. HMRC replied 04/02/20. HMRC still disagree but have refunded the client the tax in question. The tax in question was small but it was the principal that I was objecting to.

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Replying to kevinringer:
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By Ajtms
19th Feb 2020 13:20

You are lucky to get a response from HMRC's complaints team in just 2 1/2 months, but waiting 11 months for a response to your original statutory objection is as outrageous as the circumstances of my case as outlined above. You say that HMRC disagree with s9ZB TMA 1970, but obviously they cannot as that is the law. It is great to hear that you have forced HMRC to comply with the law as without people like you and I to enforce it, HMRC will continue to get away with it. I hope you will now issue a separate bill to your client for all the unnecessary work and when you client has paid it, send the receipted invoice to HMRC with a demand that they compensate your client accordingly.

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