Silver top-slices a win over HMRC

slicing
istock_erhui1979_aw6
Share this content

Top-slicing relief frequently occurs in tax exam questions but it’s rarely encountered in real life, so many advisers don’t know how to perform the calculation. But apparently, neither does HMRC.

Case in point: HMRC’s calculations of top-slicing relief on a chargeable event gain were found wanting in a  recent FTT case: Marina Silver v HMRC (TC07013).

In May 2015, Silver surrendered a life insurance bond and the insurance company issued a chargeable event certificate showing a gain of £110,721.93. The term of the bond was 21 years. Her other income in 2015/16 was £31,101.

HMRC argued (and Silver disagreed) that as her adjusted net income (for the purposes of ITA 2007 s 35) was £141,822, she was not entitled to any personal allowance. Judge Mosedale agreed with HMRC: the chargeable event gain counts as income, and if the adjusted net income exceeds £121,200 (for 2015/16) then the personal allowance is withdrawn. Every tax return software product does this.

Top-slicing twist

Silver argued that she was entitled to top-slicing relief of about £22,000 under ITTOIA 2005 s 535. According to HMRC, she was only entitled to about £2,000 of top-slicing relief. The actual figures may differ slightly as the judgment does not give all the information needed to calculate them accurately.

Judge Mosedale agreed with Silver that HMRC wanted to overcharge the taxpayer by about £20,000.

Good spot

Anyone who has heard Tim Good or Giles Mooney lecture (or viewed TAXtv) in the last two years will know that this is the same argument Good and Mooney have been putting forward since they realised HMRC’s error while preparing their own tax software.

Good commented: “I wasn’t getting the same answer as the Revenue software and further research led me to the conclusion that they were getting it wrong and I was getting it right. We knew this issue would probably have to go to Tribunal and I’m delighted that Barbara Mosedale has agreed with Silvers’ and my logic”.

Although the top-slicing calculations are complicated, the statutory provisions are not. As Judge Mosedale says in her judgment: “S536 clearly directed a hypothetical tax calculation to be carried out on certain assumptions. It would be wrong to carry out the calculation without using those assumptions consistently. Consistently applying the assumption that Mrs Silver’s income was only £36,373.43 meant that she was (in this hypothetical scenario) entitled to a personal allowance in this calculation”.

Judge Mosedale goes on to say: “Moreover, parliament’s intent with top slicing relief was obviously to allow a person who has taken income over a number of years to have relief when provisions taxed them to the entire income in a single year, as here. The relief was intended to make the tax liability approximate to what it would have been had the income been taxed in the year it was actually received. So when carrying out the hypothetical tax calculation it made every kind of sense that the taxpayer should be treated as entitled to the reliefs that that hypothetical income would have entitled her to”.

The next stage

HMRC is believed to be planning to appeal this case to the Upper Tribunal so we can expect them to continue to resist top-slicing relief claims based on the interpretation of the legislation, now endorsed by Judge Mosedale.

In the meantime agents and tax advisers should:

  • identify clients who may have been overcharged tax (many of these will be deceased estates);
  • calculate the top-slicing relief as directed by Judge Mosedale;
  • if the client has been overcharged - amend the tax return.

All tax years from 2011/12 onwards are worth looking at because that’s when the tapering of the personal allowance was introduced when total income exceeds £100,000.

In-time years

Tax returns already filed for 2017/18 can be amended by 31 January 2020.

SA tax returns for 2019/20 should be filed using the correct basis of calculation for top slicing. As far as can easily be checked, every tax return software product has simply used the same basis as the incorrect HMRC calculator so advisers will either have to file a paper return or file online and then submit an amendment on paper.

Good confirms what he’d do for affected clients: “Personally, I’d pay the incorrect tax and then seek to recover it at a later date rather than have to deal with HMRC demands for penalties, surcharge or interest. Overpayment relief claims can be made within four years from the end of the relevant tax year. So claims for 2015/16 and 2016/17 are still in time.”

How to calculate the correct relief

Back in September 2017, Tim Good wrote a detailed technical article about this problem, including worked examples detailing exactly what the issues are.

Absolute Software has also made its top-slicer checker free to use. This will identify whether the HMRC figure is right or wrong.

About Rebecca Cave

Consulting tax editor for Accountingweb.co.uk. I also co-author several annual tax books for Bloomsbury Professional and write newsletters for other publishers.

Replies

Please login or register to join the discussion.

03rd May 2019 19:19

The fact that you cannot submit the returns online and that HMRC will probably "correct" any paper returns and offer a revised assessment based on their own calculation (since their staff will just bung the figures into their own system) means that amending may be a waste of time. Sadly Self Assessment seems to be a misnomer in that regard.

If HMRC are not successful with their appeal the likelihood is they will themselves review and amend all the earlier assessments as they did recently with various other tax calculation errors.

Perhaps it would be better to do nothing yet except advise affected clients of the situation and tell them to wait for the result of the appeal. This situation reminds me somewhat of Mansworth Jelly in the way back when and this issue could rumble on for a while.

Thanks (1)
avatar
08th May 2019 11:48

I have a few to put a claim in for.

Any for 2018/19 I will file the tax return online (which will currently be 'incorrect') then put a paper amendment/appeal in ready for the UT outcome.
Don't want to miss the boat with these claims.

Although 2011/12 is out of date and HMRC would argue 'practice prevailing' I expect to refuse such claims.
EDIT - any way to make claims pre 2015/16?

Thanks (0)
to Mister E
08th May 2019 14:51

My own view is that overpayment relief claims should be made for 2015/16 and 2016/17. HMRC will reject on the basis of "practice generally prevailing" (PGP) but see Turners (Soham) Limited TC/2016/3270 for a recent case reviewing the PGP criteria: I think HMRC will struggle to persuade a Tribunal that their incorrect top slicing caclulations were PGP.
For years 2010-11 to 2014-15 I would submit late overpayment relief claims citing ESC B41.

Thanks (2)
08th May 2019 13:43

It says

Judge Mosedale agreed with HMRC: the chargeable event gain counts as income, and if the adjusted net income exceeds £121,200 (for 2015/16) then the personal allowance is withdrawn.

BUT it says

Judge Mosedale agreed with Silver that HMRC wanted to overcharge the taxpayer by about £20,000.

So my question is WHY? I can't see that it's clear here and I am a bit confused. Its clear there is no PA, so what is the ''twist'' argument about?

Please someone put me out of my misery :)

Thanks (0)
to Tom 7000
08th May 2019 14:43

The tax liability under s23 ITA 2007 can only benefit from the tapered PA but the top slicing relief calculation requires us to calculate hypothetical tax on the hypothetical basis that only one slice is included and in that hypothetical calculation Judge Mosedale agrees that the hypothetical PA will be based on the hypothetical income including just one slice.

Thanks (0)
avatar
25th Jun 2019 20:46

Hypothetical Personal Allowance?

Short Explanation:

The Judgement in Silver v HMRC 2018, is fair, but the basis of reasoning may be undermined, esp as there doesn't seem to be any consideration given to the intentions of the restriction on the personal allowance, brought about by ITA2007/FA2009.

Just because a calculation allows for one parameter to be hypothetical, does not necessarily permit or render all other parameters to be treated as being hypothetical.

Long Explanation:

Looking at ITTOIA 2005 s535, the hypothetical aspects are due to the treatment of the chargeable event gains, which can be broken into slices, to then be used to calculate the top slicing relief.

The legislation does not explicitly provide for any other type of manipulation, or provision to treat other parameters or values as being hypothetical unless stated, i.e. it does not treat the personal allowance, PA, as being a hypothetical value.

Therefore, the calculation is definitely hypothetical, but is only hypothetical in so far as the legislation directs, which is the fragmentation of any chargeable gains, encashment lump sum etc, into fractional slices.

*As the PA , at the time of ITTOIA 2005 s535 was enacted, was unrestricted, and there was no need to explicitly state whether or not the PA needed any special treatment in order to make the top slicing relief work as intended.*

*Just because a calculation allows for one parameter to be hypothetical, does not necessarily permit or render all other parameters to be treated as being hypothetical.*

The intentions of the ITTOIA 2005 s535 is clear. However this needs to be juxtaposed with the calculation steps in ITA2007, and ITA2007/FA2009's new treatment of the PA, due to the amendments/insertions of section 35(2) - (4), made by FA 2009 section 4.

Some conclusions in regards to the new treatment of the PA may be obvious from the start, i.e. to limit and restrict the PA for incomes over a certain level.

In addition to this, the ITA2007 explicitly lays out the calculation steps, the determination of the personal allowance value, and then reliefs and reductions at predetermined steps. It should also be noted that ITTOIA 2005 s535 is also explicitly referred to by ITA2007, at a specific step of the calculation of the tax liability. i.e. step 6.

Given that at the time of of the PA restrictions introduced by FA2009;

a. The TSR legislation was already known
b. The step at which the TSR is to be calculated was defined in ITA 2007
b. The prior use of the PA in conjunction with the TSR was also known

One could state that, as these were all known, any exceptions would have been explicitly stated and defined, save for any unintentional oversight.

The question is whether or not the intentions of the introduction of the restrictions to the PA and its redefinition as a calculated value, was also to have its new effect felt everywhere it was/is to be used, including having an effect on the TSR, ITTOIA 2005 s535 relief.

If the intension was to restrict the use of the PA everywhere, including for top slicing relief, there wouldn’t be any reason to additionally state anything.

However if there was an oversight, and the intention was to modify the definition/treatment of the personal allowance, exclusive of its use when calculating top slicing relief, then this has to be argued.

Michael Morris

Thanks (0)
avatar
25th Jun 2019 23:37

Hypothetical Personal Allowance?

Short Explanation:

The Judgement in Silver v HMRC 2018, is fair, but the basis of reasoning may be undermined, esp as there doesn't seem to be any consideration given to the intentions of the restriction on the personal allowance, brought about by ITA2007/FA2009.

Just because a calculation allows for one parameter to be hypothetical, does not necessarily permit or render all other parameters to be treated as being hypothetical.

Long Explanation:

Looking at ITTOIA 2005 s535, the hypothetical aspects are due to the treatment of the chargeable event gains, which can be broken into slices, to then be used to calculate the top slicing relief.

The legislation does not explicitly provide for any other type of manipulation, or provision to treat other parameters or values as being hypothetical unless stated, i.e. it does not treat the personal allowance, PA, as being a hypothetical value.

Therefore, the calculation is definitely hypothetical, but is only hypothetical in so far as the legislation directs, which is the fragmentation of any chargeable gains, encashment lump sum etc, into fractional slices.

*As the PA , at the time of ITTOIA 2005 s535 was enacted, was unrestricted, and there was no need to explicitly state whether or not the PA needed any special treatment in order to make the top slicing relief work as intended.*

*Just because a calculation allows for one parameter to be hypothetical, does not necessarily permit or render all other parameters to be treated as being hypothetical.*

The intentions of the ITTOIA 2005 s535 is clear. However this needs to be juxtaposed with the calculation steps in ITA2007, and ITA2007/FA2009's new treatment of the PA, due to the amendments/insertions of section 35(2) - (4), made by FA 2009 section 4.

Some conclusions in regards to the new treatment of the PA may be obvious from the start, i.e. to limit and restrict the PA for incomes over a certain level.

In addition to this, the ITA2007 explicitly lays out the calculation steps, the determination of the personal allowance value, and then reliefs and reductions at predetermined steps. It should also be noted that ITTOIA 2005 s535 is also explicitly referred to by ITA2007, at a specific step of the calculation of the tax liability. i.e. step 6.

Given that at the time of of the PA restrictions introduced by FA2009;

a. The TSR legislation was already known
b. The step at which the TSR is to be calculated was defined in ITA 2007
b. The prior use of the PA in conjunction with the TSR was also known

One could state that, as these were all known, any exceptions would have been explicitly stated and defined, save for any unintentional oversight.

The question is whether or not the intentions of the introduction of the restrictions to the PA and its redefinition as a calculated value, was also to have its new effect felt everywhere it was/is to be used, including having an effect on the TSR, ITTOIA 2005 s535 relief.

If the intension was to restrict the use of the PA everywhere, including for top slicing relief, there wouldn’t be any reason to additionally state anything.

However if there was an oversight, and the intention was to modify the definition/treatment of the personal allowance, exclusive of its use when calculating top slicing relief, then this has to be argued.

Michael Morris

Thanks (0)
avatar
to redleader
28th Jun 2019 11:53

At the time of writing, there were problems with the server and posts were queued. Now duplicated.

Thanks (0)