Interest on interest

My client Mr Rich — a higher-rate taxpayer — has a joint bank account with his wife Mrs Rich (who is also a higher-rate taxpayer) that yields annual interest of about £25 000 net. In 2005-06 my client instructed me to include all of the said interest on his own tax return and the additional tax of £6 250 was paid by the due date.

Subsequently HMRC opened an aspect enquiry into Mrs Rich's return querying her share of the interest on this account. In my naivety and as no tax had actually been lost to HMRC I replied that it was all on Mr Rich's return but point taken I would make sure that future years are correct.

This was not acceptable and Mrs Rich was assessed on her share and Mr Rich received a repayment but with...