HMRC digs in over top-slicing calculations
Tax guru Tim Good is determined to prove that HMRC’s computer is still producing the wrong answers for many taxpayers with chargeable event gains on their tax returns.
Rebecca Cave talked to Tim Good about his battle with HMRC over top-slicing relief for chargeable event gains and how taxpayers can get the correct tax relief.
Rebecca Cave (RC): What is top-slicing relief?
Tim Good (TG): When an individual cashes in a non-qualifying life assurance policy, they receive a lump sum which has accrued over the life of the policy.
Although we call it a chargeable event gain (CEG) it is actually taxed as savings income. Normal tax rules would charge the whole of that CEG to income tax in the year it is received. This will often push the taxpayer into the higher tax bands for that tax year, meaning they pay more tax than if the profit from the policy had been paid evenly throughout its life.
The taxpayer may also lose access to their personal allowance if their total income including the CEG exceeds £100,000 (since 2010/11), and the right to use their personal savings allowance of £1,000 or £500.
Top slicing relief hypothetically spreads the CEG over the years of the policy, such that the tax is payable as if the CEG had been received in equal amounts in every year. It’s not an exact calculation as it doesn’t match the income to the actual tax years, but it gives a good approximation.
RC: Why is the calculation of top-slicing relief so difficult?
TG: It really isn’t. The law requires the taxpayer to perform two calculations:
- tax due when the whole CEG is taxed in one year;
- tax due when just one year’s worth of the CEG is taxed in the final year.
The tax in the second calculation should be calculated using the hypothetical (based on one year’s worth of the CEG) personal and savings allowances, rates and tax bands for the year in which the CEG was received, multiplied by the number of years of the policy. HMRC’s calculation does not take into account all the allowances that would apply in the hypothetical second calculation above.
The top-slicing relief is the result: calculation 1 minus calculation two.
RC: Wasn’t this argument resolved with the Marina Silver case?
TG: Mrs Silver won her case (and a refund of £19,000) at the first tier tribunal (FTT) over additional top-slicing relief due for 2015/16, but HMRC is challenging the result at the upper tribunal. There is also another top-slicing relief case in the pipeline which may be heard at FTT by the end of this year.
RC: As HMRC lost at FTT has it changed its tax calculation to produce the correct result?
TG: HMRC did change its top-slicing relief calculator in late 2018, but only to incorporate the personal savings allowance and other issues I had highlighted in technical articles.
Current commercial tax return software should reflect this revised tax calculation, but will still apply HMRC’s restriction on the personal allowance despite the judgment against them in Silver.
RC: So when will the incorrect top-slicing relief calculations for earlier years be corrected by HMRC?
TG: HMRC did carry out a “recovery exercise” in November 2018 which identified between 30,000 and 40,000 self assessment computations for 2016/17 that needed to be recalculated because of other errors relating to the allocation of allowances and reliefs.
RC: Does this mean that up to 40,000 taxpayers are now due a refund for 2016/17 as they didn’t get the full amount of top-slicing relief?
TG: No. Not until HMRC accepts the Silver judgment and further amend their calculator. When they do, many taxpayers will be due a refund, and not just for 2016/17 as the issue with the top-slicing relief goes all the way back to 2010/11 when the tapering of the personal allowance for income over £100,000 was introduced. The amount due will vary from a few hundred pounds to tens of thousands.
RC: How can accountants check that their clients have been given the right amount of top-slicing relief for all earlier tax years?
TG: I have compiled a top slicer tool that covers the tax years 2013/14 to 2019/20, which is available for a reasonable cost per tax year.
RC: If the taxpayer has paid too much tax for 2016/17 or an earlier year, how can he claim a refund?
TG: HMRC is resisting overpayment relief claims for 2015/16 and 2016/17 on the grounds that the original calculations were done according to “practice generally prevailing”. I anticipate that this will require a separate tribunal hearing to require HMRC to make those repayments.
RC: What should the taxpayer do if the overpaid tax relates to a year which is now out of time for a repayment claim, ie over four years ago?
TG: For those earlier years the taxpayer should be able to rely on extra-statutory concession B41 which says: “… repayments of tax will be made in respect of claims made outside the statutory time limit where an overpayment of tax has arisen because of an error by the Inland Revenue or another Government Department, and where there is no dispute or doubt as to the facts.”
However, I am not yet aware of anyone playing the ESC B41 card.