Overpayment Relief

By | 27 September 2010

Tax advisers will doubtless be familiar with ‘error or mistake’ claims. These claims broadly arise if a taxpayer has paid (or been assessed to) tax which they believe is not due.

Error or mistake claims were sometimes referred to as ‘section 33 claims’, because the statutory reference for the claim was in section 33 of the Taxes Management Act 1970. The replacement rules are in TMA 1970, Sch 1AB (‘Recovery of overpaid tax’) and apply from 1 April 2010. Section 33 in its amended form simply cross-refers to this new legislation. The rules apply for income tax and capital gains purposes, where the tax paid was not due, or if HMRC has made an assessment or determination of tax which the taxpayer believes is excessive. The relief must be claimed within the statutory time limit of four years after the end of the relevant tax year (Sch 1AB, para 3(1)).

Relief denied

No overpayment relief will be given in certain circumstances. These are listed in the legislation as Cases A to H. For example, Case A provides (among other things) that no relief is given for mistakes in a claim, election or notice.

Case C denies overpayment relief if the taxpayer has missed the time limit for seeking relief, and knew, or ought reasonably to have known, that the relief was available before the end of that time period. This “reasonable belief” requirement means that taxpayers will need to pass a subjective test, which may be difficult particularly if the taxpayer has a professional adviser.  

Case G also denies relief if the tax liability was calculated in accordance with the ‘practice generally prevailing at the time’. This is similar to a restriction in the previous legislation. It can sometimes be difficult to convince HMRC that this test is met. At the other extreme, HMRC cannot argue that an incorrectly inserted figure on a tax return is in accordance with prevailing practice. 

HMRC guidance

The HMRC guidance on overpayment relief is contained in the Self Assessment Claims Manual. It states that the relief not only applies for income tax and CGT purposes, but also to corporation tax and Class 4 NIC (SACM12005). The corresponding relief legislation for companies is in FA 1998, Sch 18, para 51(1).

Overpayment relief claims must be made in the correct form. If a relief claim arises from a mistake in a partnership tax return, all the relevant partners must agree to the claim, and one partner must be nominated to make it (SACM12045).    

Reasonable belief

With regard to Case C and the “reasonable belief” test (see above), HMRC rather worryingly instructs its officers: “You must judge on a case by case basis whether a person ought reasonably to have known that they had made a mistake and could obtain a repayment or correct an excessive assessment”. The guidance adds that HMRC officers “…should consider whether, taking into account their ability and circumstances, the person took reasonable care to ensure they paid the right amount of tax, and had reason to suppose that they might have overpaid.” HMRC officers are also reminded that taxpayers are not required to take advice on every aspect of their tax affairs, or to avoid every possible mistake, but that the person is expected to take note of any advice or guidance given by advisers or HMRC (SACM12085).

The ‘practice generally prevailing’ exception from overpayment relief has the potential to cause difficulties, because it involves HMRC making a judgement call. However, HMRC’s guidance on the subject offers some encouragement to taxpayers and their advisers. It states the following (SACM12105):

“In relation to overpayment relief, the onus is on HMRC in any appeal hearing to demonstrate that there was a practice generally prevailing. You may need to refer, among other things, to our published guidance, advice from HMRC technical specialists, reported cases and external comment as evidence of a practice generally prevailing”. The Self Assessment Claims Manual also includes some helpful guidance on the form and content of overpayment relief claims.

The above article is reproduced from ‘Practice Update’ (September/October 2010), a tax Newsletter produced by Mark McLaughlin Associates Ltd. To download current and past editions of Practice Update, see the Newsletters section.