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UT corrects FTT over termination payment tax

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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.

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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.

Thanks (2)
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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.

Thanks (1)