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UT corrects FTT over termination payment tax

Taxpayer Heather Jones fought her own case all the way to the upper tribunal (UT) to get HMRC to agree that sufficient tax had been deducted by her former employer from her termination payment. 

7th Aug 2020
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Jones left her employer, Doubletake Studios Limited (DTS), on 31 October 2010, and agreed to a redundancy payment of £36,700. Payment was to be made in four equal instalments of £9,175.

Under s403 ITEPA 2003, the first £30,000 of a redundancy payment is exempt from tax, if certain conditions are met. The remaining £6,700 of Jones’ payment should have been subject to tax at the higher rate of 40%.

Inconclusive evidence

Jones received three payments of £9,175, and a final payment of £6,515.04, which on the face for it indicates that deductions totalling £2,659.96 were made from that final payment.

Jones was not provided with a final payslip from DTS, and had no documentation from them to show what the payment of £6,515.04 comprised, save for an email chain discovered after the first tier tribunals’s (FTT) decision.

As a P45 form had been issued to Jones before she received her final instalment of the termination payment, DTS was required to deduct 20% tax (£1,340) from the taxable portion of her termination payment (£6,700) under PAYE Reg 37, and this is what it reported to HMRC under RTI.

DTS subsequently went into liquidation, and HMRC was unable to glean any further information from the liquidators.

Discovery assessment

Jones did not declare the taxable part of her redundancy payment (£6,700) in her 2011 tax return.

In April 2015, HMRC raised a discovery assessment in respect of the balance of the tax due of £1,351.20. This was made up of: £1,340 (20% x £6700) plus 310.40 under deduction less £299.20 credit.

However, Jones was convinced that tax of £2,659.96 had already been deducted from her final payment, so she shouldn’t have to pay a further £1,340 in tax for the year. She therefore appealed against the assessment to the first tier tribunal.

FTT hearing

Jones represented herself at the FTT hearing [TC06267] in April 2016, following which she was given the opportunity to obtain further evidence to show that tax at 40% had been deducted.

The taxpayer reached out to DTS’ liquidators but was told that the company’s records, stored in some 740 boxes, had been archived and would not be reviewed. Jones’ request to issue a witness summons to the liquidator was denied by the FTT.

In December 2017, the FTT dismissed Jones’ appeal, concluding that she had not discharged the burden on her to show that the figures in HMRC’s assessment should be reduced or the assessment set aside.

What was the correct amount of tax?

Following the FTT’s decision, Jones discovered an email chain when clearing out her inbox. In it, she queried why her final payment had been £6,515 and not £9,175. The emails confirmed that the difference was down to tax.

Jones applied to have the FTT’s decision set aside in January 2018. The FTT refused, arguing that the email chain was not sufficient to justify confirmation of the amount of tax deducted: 40% of £6,700 was £2,680, but the deduction taken in this case was £2,660 [39.7% x £6700].

In October 2019, the FTT granted Jones permission to appeal to the UT.

Appeal to upper tribunal

Jones also argued her own case at the UT saying the FTT had erred in law on the following grounds:

  • The FTT had been wrong to conclude that the email chain did not add anything to her case, and had focused too heavily on the assumption that a 40% tax rate must have been applied to the £6,700 in order for the deduction to have related to tax;
  • The FTT’s findings of fact contained errors relating to her bank statements;
  • The FTT’s refusal of her application for a witness summons to the liquidator unjustly denied her access to crucial evidence in support of her case.

UT judgment

In terms of the email chain, the UT noted that it was clear DTS’ explanation for the deduction was that it was solely for tax. As a result, the email chain was highly relevant. By dismissing evidence which so clearly went to the essence of the issue under appeal, the FTT had erred in law.

The UT also noted that it was not clear why there had been an assumption that the deduction had to be precisely 40% for it to relate to tax, given potential other factors at play, including the fact that the payment was made outside of the normal payroll cycle.

The FTT had mistaken a transfer out of Jones’ bank account of £9,175 as a payment into her account, and this was not in dispute. This meant the FTT had again erred in law, as it had made an unsupported finding of fact on a relevant matter, which then led it to positing a wrong assumption about the nature of the subsequent payment of £6,515.04.

The UT concluded that the FTT had not erred in law in refusing an application for a witness summons for the liquidators.

Discovery assessments not valid

To support the discovery assessments, HMRC had to show that there had been a discovery leading to a loss of tax and that this had been brought about by the carelessness or deliberate action of the taxpayer.

There was nothing in HMRC’s statement of case to show how Jones had acted carelessly or deliberately, and no similar discussion was provided in the FTT’s decision. There was no suggestion Jones had made any concession that the discovery assessment was valid.

The UT declined to remit the case back to the FTT, as it would not have been in the interests of justice to allow HMRC to make a case that it ought to have made the first time round.

Accordingly, the UT remade the decision and allowed the appeal on the basis that HMRC had not discharged the burden on it to show the discovery assessments were valid.

Comment

The UT also highlighted a core issue during this appeal: whether Jones was entitled to take into account the amount deducted in excess of 20% in calculating her own liability to tax (given that DTS was only entitled to deduct tax at the basic rate). Alternatively, was Jones left with a claim against DTS rather than a credit for tax deducted at source on her self-assessment?

The FTT did not raise this point and, due to the UT’s determination that HMRC’s discovery assessments weren’t valid, we did not hear the UT’s comments on this issue.

Replies (5)

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By Paul Crowley
08th Aug 2020 21:55

Well done Heather.
This shows all concerned (except Heather) in the limelight of shame.

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By johnjenkins
10th Aug 2020 10:03

It is absolutely disgusting that the liquidator (with all the powers they have) didn't release relevant information that certainly would have saved Heather the trouble of having to go to the UT. The deduction of tax was a matter of fact and the FTT should have allowed the witness statement from the liquidator.

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By Springfield
10th Aug 2020 10:08

This sort of shoddy treatment by HMRC will continue for as long as there is no downside to them in their errors or unjustified tax claims. I have long argued that there should be a doubling up rule which says that if HMRC make a false claim that you owe them, say £1,000, and they lose - they should pay the tax payer £2,000.

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By ShayaG
10th Aug 2020 14:40

I am full of admiration for Ms Jones for not letting the b* grind her her down.

On the technical side, I think this stretching the definition of "erred in law" to breaking point. The FTT failed to draw obvious conclusions from an email chain that tax had been deducted less £20 that nobody could or should have to explain.

That was not erring in law - that was erring in common sense.

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By richard thomas
10th Aug 2020 14:51

There are in fact two other people who should not share Paul Crowley's limelight of shame: the Upper Tribunal for a sane and sensible decision and the HMRC case officer for doing their job.

Heather Jones won her appeal outright because of the error of HMRC’s presenting officer in not seeking to justify the discovery assessment before the FTT, something the FTT should have picked up.

Had HMRC sought to justify the assessment they would have been able to, as the appellant omitted the excess over £30,000 of her termination payment from her return.

The Upper Tribunal carefully did not decide whether, had they upheld the validity of the assessment, they would have decided that the credit for PAYE was 40%, not 20%, or instead that Ms Jones would have had to make a claim against the liquidators for the money incorrectly deducted.

In my view, the correct approach to the question: tax deduction or claim from employer? is this. The FTT’s task was to decide whether Ms Jones was overcharged by the assessment, and to reduce it if she was (s 50(6) TMA). The first question with a discovery assessment is: what was the amount of the actual “loss of tax”? In such a case the loss of tax is found by analogy with the provisions concerning a self-assessment in s 9 TMA. One has to find what the tax correctly due would have been if the self-assessment had been correct in respect of the termination payment (the PLR in penalty terms) and deduct from that that the tax shown on the SA.

Section 9(1)(b) TMA requires that a self-assessment takes into account in arriving at the tax payable any “tax deducted at source”. The return form (additional information pages) and the notes for completing it tell people to put the amount of tax deducted by the employer in box 6 on page Ai2. Had Ms Jones completed the return and the Ai pages correctly (eg with the help of a good tax adviser and/or the HMRC Guidance Notes), this would be the 40%. An employee like Ms Jones with no post-cessation “pay slip” but a bank account with details of the payments would have no reason to think that the employer had only accounted for and paid half of the amount apparently deducted, and had done so correctly). HMRC have used the only figure of tax deducted they had, the figure paid over and reported to them on a P14, the 20%, but is there any reason in law why the additional 20% not paid to them is not deductible/creditable?

Normally the only basis on which the tax deducted at source figure in a discovery assessment can be adjusted would be by using regulation 188(3) of the PAYE Regulations. But sub-paragraph (a) does not apply as the employer did not fail to deduct what it should have (20%) nor was the payment a notional payment. Sub-paragraph (b) does not apply because there is no underpayment or overpayment here (which must in my view refer to a one from a different year) and sub-paragraph (c) is clearly irrelevant.

Thus a self assessment completed in accordance with the HMRC guidance notes for page Ai2 would have shown the excess of the termination payment over £30,000 and tax of 40% as deducted. Thus it could be argued that the tax lost is nil, being the tax charged on the excess at 40% less the tax deducted at 40%.

The counter-argument would have to be that tax incorrectly over-deducted by the employer is not “tax deducted at source” within s 9(1)(b) TMA. “Tax deducted at source” is defined for the purposes of s 9 by s 8(5) TMA:

“any reference to income tax deducted at source is a reference to income tax deducted or treated as deducted from any income or treated as paid on any income.”

which does not take us much further. But is the additional 20% “tax” that was deducted? Under regulation 37(2):

The person making the payment must deduct tax at the basic rate in force for the tax year in which the payment is made.

There is therefore no scope for treating anything above that rate as “tax”. There was therefore a loss of tax.

Had the discovery assessment not been invalid, then the UT should in my view have upheld the assessment. It seems highly likely that the s 29(5) TMA condition was met, as the return omitted both the payment and the tax deducted, so no hypothetical inspector could be expected from the return alone to be aware of a loss of tax. They might from the P14 have been able to work about that there was a post-cessation payment from which BR had been correctly deducted and accounted for, but that is not relevant.

A more difficult question is whether if the payment and tax at 40% had been returned, s 29(5) could still have applied. Can there really be a loss of tax where a return had been completed in accordance with HMRC’s guidance?

I have said HMRC were not at fault in this case, by which I mean the officer who made the discovery assessment. That is because the tax return and the HMRC systems do not cater for the possibility that the tax deducted by the employer is not, or not all, paid over to HMRC or indeed is not tax at all and should not be paid over. Ms Jones is very lucky that she has not had to resort to claiming the extra 20% incorrectly deducted from her employer.

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