Too Late? Not Necessarily
By Mark McLaughlin
Mark McLaughlin highlights a less well known part of the rules that can provide relief for overpaid tax.
Many tax advisers will doubtless remember making ‘error or mistake’ claims for some of their clients. Those claims would broadly arise if taxpayers had paid (or been assessed to) tax which they believed was not due.
Error or mistake claims were sometimes referred to as ‘section 33 claims’, because the legislation concerning such claims was contained in TMA 1970, s 33. The provisions of that section were subsequently replaced with effect from 1 April 2010, and the current version of s 33 simply cross-refers to provisions dealing with claims for the recovery of overpaid income tax and capital gains tax, which are contained in TMA 1970, Sch 1AB ('Recovery of overpaid tax'). Overpayment relief must generally be claimed within the statutory time limit of four years after the end of the relevant tax year (Sch 1AB, para 3(1)).
Corresponding relief provisions in respect of tax overpaid by companies are contained in FA 1998, Pt VI, but this article focuses on TMA 1970, Sch 1AB as it applies to claims by individuals.
A part of the overpayment relief provisions (TMA 1970, Sch 1AB, para 3A) that is probably less well known than the successor to the old error or mistake relief concerns tax determinations by HM Revenue and Customs (HMRC) (under TMA 1970, s 28C). It is commonly referred to as ‘special relief’.
By way of brief background, those tax advisers who remember making ‘error or mistake’ claims may also recall asking HMRC to apply the practice of ‘equitable liability’ in one or two cases. Prior to 1 April 2011, taxpayers (or their advisers) could ask HMRC to apply the non-statutory practice of equitable liability to reduce excessive assessments or displace determinations, where the statutory time limit for displacing them had passed. However, HMRC would only be prepared to consider this concessionary treatment in certain circumstances, where it would be “unconscionable” to collect the full amount of tax legally due (see Tax Bulletin 18, August 1995).
From 1 April 2011, the non-statutory practice of equitable liability was replaced by a statutory special relief (TMA 1970, Sch 1AB, para 3A). Where HMRC makes a determination but the tax charged is excessive, this special form of overpayment relief is available if certain conditions are satisfied. However, it should be noted that if HMRC have brought proceedings enforcing the tax in question, the person making the claim must not have been present or legally represented at the enforcement proceedings (para 3A(1)).
Unlike normal overpayment relief claims, there is no time limit for claiming special relief. Thus special relief can be claimed even if more than four years have elapsed since the end of the relevant tax year (SACM12220).
A special relief claim is subject to three conditions (A to C), all of which must be satisfied in addition to the remaining requirements for overpayment relief (subject to certain exceptions; see Sch 1AB, para 3A(1)(b)). These conditions are broadly as follows (Sch 1AB, para 3A(4)-(6)):
- Condition A - It would be “unconscionable” (in HMRC’s opinion) for HMRC to seek to recover the amount which has been charged by the determination (or refuse to repay it, if it has already been paid);
- Condition B - The person’s tax affairs are otherwise up to date, or arrangements have been made to HMRC’s satisfaction to bring them up to date as far as possible; and
- Condition C - The person has not previously claimed special relief (or sought equitable liability; see HMRC’s guidance in the Self-Assessment Claims manual at SACM12260), whether or not relief was given (Sch 1AB, para 3A(7)); or if the person has done so, there are exceptional circumstances for a further claim to be made on the present occasion.
A special relief claim must include such information or documentation as is reasonably required to demonstrate that conditions A, B and C are met (Sch 1AB, para 3A(8)).
HMRC defines ‘unconscionable’ as “completely unreasonable” or “unreasonably excessive”. Circumstances in which the unconscionable requirement in Condition A above may be satisfied includes where a person is suffering from a temporary or sporadic illness which makes tax compliance difficult, or has not received HMRC notices, etc. for reasons outside his or her control, or is insolvent (i.e. where pursuing the determination would be detrimental to other creditors) (SACM12240).
As indicated, the unconscionable test is a matter of HMRC’s “opinion”. The subjective nature of this test can cause difficulties, and has resulted in case law on the issue.
In Maxwell v Revenue & Customs  UKFTT 459 (TC), HMRC issued determinations to the taxpayer, which turned out to be excessive. Tax returns were subsequently submitted to HMRC for the relevant years, but they were out of time to displace the determinations. The taxpayer claimed special relief, and appealed when HMRC refused to allow his claim. The taxpayer argued that his previous accountant had assured him that his tax returns would be dealt with. Whenever he received correspondence from HMRC, the taxpayer took it to his accountant, who assured him that everything was in order. Unfortunately, the accountant became unwell, and subsequently died. The taxpayer had not known about his accountant’s illness.
The First-tier Tribunal held that the taxpayer had acted appropriately in relation to his tax affairs, by engaging an agent whom he believed was handling his tax affairs correctly. The tribunal was satisfied that the taxpayer was unaware of his accountant's medical condition, and accepted that Condition A above was met. Conditions B and C were also met. The taxpayer’s appeal was therefore allowed.
More recently, in Clark v Revenue & Customs  UKFTT 324 (TC), the taxpayer was a self-employed painter and decorator in 2002/03 and 2003/04, working around three days per week. He ceased in March 2004, and did not re-commence self-employment until 2013. HMRC issued self-assessment returns for the tax years 2002/03 to 2007/08 inclusive. However, the returns were not filed. HMRC subsequently issued determinations of the taxpayer’s tax liability. The determinations were made without reference to actual business records, which indicated that the taxpayer’s income was less than his tax allowances for each of the relevant tax years.
The taxpayer failed to submit his tax returns timeously to displace HMRC’s determinations. He subsequently sought special relief against the liabilities in respect of HMRC’s determinations. HMRC refused the claim, maintaining that one of the conditions for special relief (Condition A, i.e. the unconscionable test) was not satisfied. The taxpayer appealed.
The First-tier Tribunal considered that the question of whether it was unconscionable for HMRC to refuse the taxpayer’s claim had to be considered against the background of the taxpayer's circumstances, i.e. his dyslexia, general learning difficulties, his reliance on other family members in the absence of his wife (following their separation, and her later death) and the probable destruction of much of the relevant notifications from HMRC. In the context of the case, the tribunal considered that HMRC's refusal of the taxpayer’s special relief claim was unreasonable. The tribunal also considered that it would be unconscionable for HMRC to pursue recovery of the tax for the purposes of Condition A. The taxpayer’s appeal was therefore allowed.
Claims and elections for tax reliefs are invariably subject to statutory time limits. What perhaps makes special relief so ‘special’ is that there is no time limit for claiming it. However, the relief conditions are cumulative, and potentially onerous. Condition A is particularly difficult, as the ‘unconscionable’ test is a subjective one.
Nevertheless, as the successes in the above cases might suggest, taxpayers should not be deterred from taking their case to the First-tier Tribunal in appropriate circumstances; the tribunal may take a more pragmatic view than HMRC on what is unconscionable, if there is unreasonable resistance to allowing relief on the basis that Condition A is not satisfied.
Published November 2015