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Nico was a higher rate employee with straightforward tax affairs. His 2000 tax return was filed and processed in July 2000. It showed an underpayment of £800 which was to be coded out in 2001-2002. In February 2001 Nico was made redundant. He decided to take up self employment and hopes to make a small profit in his first year. I expected that the underpayment from 1999-2000 would be payable in January 2003 as the figure would appear in box 18.1 on his 2002 return.
Nico was a higher rate employee with straightforward tax affairs. His 2000 tax return was filed and processed in July 2000. It showed an underpayment of £800 which was to be coded out in 2001-2002. In February 2001 Nico was made redundant. He decided to take up self employment and hopes to make a small profit in his first year. I expected that the underpayment from 1999-2000 would be payable in January 2003 as the figure would appear in box 18.1 on his 2002 return.
In April 2001 the Revenue wrote to him to say that, as he was no longer employed, the underpayment could not be collected through PAYE and he would therefore have to pay not only the £800 but also two payments on account of £400 each. He had six weeks to pay £1,200 before interest would run. Were it not for the self employment, it would have been possible to get round the payments on account, but his 2000-01 tax liability was expected to exceed £800.
When I complained about the unfairness of this, the Revenue referred me to the Self-Assessment Manual section on 'stranded underpayments' which confirms the Revenue's treatment, but I cannot find any statutory authority for this. Can readers help? If the Revenue is correct, must we change our advice that 'no tax is payable' to 'no tax is payable as long as you do not lose your job'? If Nico had not been made redundant until 6 April 2001, apparently this would not have happened.
(Query T15,893) – Letty.
The Revenue's Self Assessment Manual section 'Transfer of Liability – Transfer from COP to SA' (paragraph 1.1.1.) whilst being correct is indeed unfair. If, for example, 'Nico' had not been made redundant, then from what has been written there would not have been any need for payments on account as presumably greater than 80 per cent of the tax liabilities were met by deduction of tax at source or from tax credits on dividends. However, if this was not the case and box 23.2 on the 2000 return had been ticked so that the £800 tax underpaid was not to have been collected via his 2001-02 code number, then the two payments on account of £400 each for 2000-01 would have fallen due for payment by 31 January and 31 July 2001. Therefore technically, either way, the Revenue was definitely unfair in claiming that the second payment on account was due before 31 July 2001 and this should be pointed out to the person at the district concerned who is responsible for items such as this.
If the redundancy had not taken place until 6 April 2001, then 'Nico's' 2001 tax return would not have made any reference to this and the £800 underpayment would have continued to be collected via the 2001-02 code number, until it came to the attention of the tax district concerned that 'Nico' was no longer an employee! This, as mentioned, would probably have been sooner rather than later, because of the submission of the self employment registration form CWF1, and would not have depended on the processing of the 2002 tax return.
As far as statutory authority is concerned, then (as should be known) the tax collection rules in operation have been constructed by the Inland Revenue, as far as possible in accordance with the law as it stands. – N.K.
The rules for payment of tax on account during a year are mostly found in section 59A, Taxes Management Act 1970. Regard is had to a 'relevant amount', meaning the excess of assessed tax for the preceding year over the amount of any income tax which has been deducted at source.
The latter phrase is interpreted in subsection 59A(8) to include any amounts which, in respect of that year, are to be deducted at source under the pay-as-you-earn rules in subsequent years. Regulation 7(2)(d) of the Income Tax (Employments) Regulations 1993 (SI 1993 No 744) permits the Inspector's code to take account of any tax remaining unpaid for any previous year which is not otherwise recovered, but Regulation 12(1) permits amendment on a change of circumstances.
In view of the fact that 'Nico' is uncertain of his ability to make even a small profit in the year 2001-02, it seems reasonable to doubt whether he will have any (significant) tax liability after allowances, in the realistic light of new business prospects. Therefore his remedy is to claim under section 59A(3) or (4), Taxes Management Act 1970 that his payments on account be reduced to negligible proportions.
Encouragement to do so is given by Revenue publication SAT2 (1995) in which paragraph 3.48 indicates that penalties for erroneous claims will be restricted to instances of gross or persistent abuse, where taxpayers claim large reductions without any foundation or make undeserved claims year on year. – Lane.
Extracts from further replies received:
'Letty' could write to the Inland Revenue office concerned requesting that it raise a Schedule E assessment (or stand alone Revenue Assessment) for the £800 with a payment due date of 31 January 2003 (the balancing payment due date for 2001-02). It would then have cleared the stranded underpayment and 'Letty' could complete the return with no entry in box 18.1 and no unfair payments on account for 2002-03. – PRW.
Payments on account are calculated by reference to an individual's tax liability on income from all sources by reference to the previous year's liability. They are not due in certain circumstances. In this case it is surprising that payments on account are held to be payable in 2001 as it would have been expected that more than 80 per cent of the tax liability for 1999-2000 was covered by pay-as-you-earn deductions at source. The amount of income for 2000-01 is not relevant for the purpose of calculating the payments on account and the fact that 'Nico' commenced self employment during this year is irrelevant. On the information supplied, 'Nico' should pay the £800, but check whether the liability to make payments on account can be cancelled under the 80 per cent rule. – Mike.
