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HMRC digs in over top-slicing calculations

19th Aug 2019
Tax Writer Taxwriter Ltd
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sliced tomato

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:

  1. tax due when the whole CEG is taxed in one year;
  2. 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.

Replies (8)

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By selbygray
19th Aug 2019 12:51

If you have potential claims on the basis of Marina Silver, for 2017/2018, would you submit amended returns now?

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Tim Good profile image
By Tim Good
19th Aug 2019 13:01

Yes I would.

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Replying to Tim Good:
By tonyaustin
19th Aug 2019 14:17

Tim, your view and the Silver case have to make perfect sense and as the legislation is written. I cannot understand HMRC's argument!

Thanks (3)
By accountantccole
20th Aug 2019 11:06

HMRC seem to be sitting on one of my 2017/18 returns which needs to show lower tax due - is this likely to be why?

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By trinag24
05th Nov 2019 12:29

Interestingly today I have received two amended calculations from HMRC for clients for whom our original calculations show that no top slicing relief was due (as the slice already fell into the HR band) but now the HMRC calculations are giving them relief but no explanation as to how they arrived at that figure!!

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Replying to trinag24:
Tim Good profile image
By Tim Good
05th Nov 2019 12:38

HMRC have just sent out aboout 15,ooo corrected SA302s for 2017-18. Some of these
will reflect a change they made last year to their top slicing relief calculation. The change related to the use of the savings rate band and personal savings allowance and can result in additional TSR of up to £1,100.

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Replying to Tim Good:
By apple53
03rd Jan 2020 10:59

We are an example of HMRC doing their recalculation (and writing literally within the last couple of days that I think they were allowed to amend their own website's calculation). The recalc cost us 1100, ie 20% of 5500.
I can also confirm that in January 2019 the 17-18 calculator worked on the old basis (not taxing the initial 5500), while by Nov the 18-19 HMRC calculator now effectively taxes the 5500. However, it is optically confusing as it still shows 5000+500 of allowance taxed at 0% leaving £29k to be taxed at 20%. The adjustment appears to be inserted lower down, and in a invisible fashion, so that top slice relief is no longer half of the 40% tax. In some way, therefore, the apparent 5500 of 0% is retrospectively amended to 20%, if that makes sense!
And I can confirm that none of the savings allowance is used to reduce the tax paid on UK interest to 0% either. This seems wrong. At the very least one should get £500 tax free savings allowance. And given that the Gain divided by life of the bond in years plus all other income (in our case) is below the higher rate threshold, one should get £1000 savings tax free. And in fact given that gain/life plus non-savings income is below the personal allowance, actually one should surely also get the £5000 savings allowance?
Furthermore, if the purpose of the legislation was to tax the gain as though it would be spread across the relevant number of years, then surely if gain/life plus non-savings income is within personal allowance then there should be no tax to pay at all, ie top slice relief should be 100%?!

[For the record I am a punter rather than an accountant. The gain in our case is offshore but that seems to make no difference to the HMRC calculator].

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Replying to apple53:
Tim Good profile image
By Tim Good
06th Jan 2020 17:00

Leaving aside the topslicing issue, I wonder if HMRC have any authority to collect the extra £1,100. If a 2017-18 tax return was filed on say 6 January 2019 then HMRC had until 5 October 2019 (nine months from the filing date) to issue a corrected assessment. If the corrected assessment was issued on 28 October 2019 it was not valid and the extra tax is not payable. HMRC would have to open an enquiry within 12 months of the filing date (deadline 5 January 2020) or make a discovery assessment.
The more substantive topslicing issue is due to be heard by the Upper Tribunal on 31 March 2020.

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