Unfair and unreasonable!

With effect from April 2010 HM Revenue & Customs are taking away a long established concession or non-statutory arrangement known as “Equitable Liability”. Not a lot of people know about its existence, even professional advisers, perhaps because it does not come up too often.

What is Equitable Liability? Well, it is a practice which helped out a group of people you may not feel too sorry for; those who did not submit their Tax Returns for quite a number of years. When Tax Returns have not been submitted, HMRC is entitled under statute to estimate the tax which might have been payable by the dilatory taxpayers and make a “determination” following which they would demand payment of the estimated amount. The person who received the demand might indeed have paid it, but if Returns were then put in within about five years later than they should have been, HMRC would adjust the tax to the actual amount due. A refund could then arise.

All well and good you might say, and it serves anyone right for not submitting their tax returns on time. However there may be many reasons why a person might not have submitted a Return for a long time, including all sorts of personal difficulties. Some people might be bankrupted not for the tax they would have owed, but for an excessive amount they would not have owed if they had complied with the rules.

Equitable Liability is an arrangement under which HMRC agrees not to collect the excess tax owed over and above what should have been due if the Returns had been submitted on time. The tax remains legally due because after the time limit has expired the amount is set in stone, but it is simply not collected subject to HMRC's discretion under the practice.

This discretionary practice of allowing taxpayers who have returned to the fold (and their tax affairs must have been brought up to date) to adjust their tax payments to the amounts which would have been due is being withdrawn. HMRC says that the reasons are that it no longer has Crown Preference, which made them ahead of other creditors, and there was a tax case in the House of Lords from which they infer they no longer have the discretionary power.

It seems to me that legislation could provide such a power, rather than HMRC withdrawing the concession at the same time as reducing the window for tax liabilities to be adjusted from five years to three as will happen at the same time in April 2010.

There is a petition to the Government asking the Treasury to change its mind. This was started by Keith Gordon, the well-known tax barrister. The petition is here if you think it unfair that someone could be many times overcharged for being late with his or her tax returns. Remember interest has to be paid anyway on late paid tax due, and someone who has not submitted Returns for some years will probably have clocked up £200 per year in statutory penalties which will not be removed.

I have a current case of a new client whose tax affairs I have brought up to date, and on her behalf I am still in time to make the case for Equitable Liability and help her to gain a moratorium on tax determined for back years. The next client I take on whose circumstances are similar may not have the same option, though I can make no promises in the current case given that this is a discretionary matter.

“Equitable” is defined in my dictionary as “fair and reasonable”. I think the current proposal is unfair and unreasonable.

© Jon Stow 2009

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Amateur tax avoidance

I am not sure how people dream up ideas as to how they can avoid tax and then just do what they think is necessary without talking to a professional adviser. Very often their “cunning plans” can be very costly indeed.

I have dealt with a client who arranged for his father to give away his parents' house to him to avoid inheritance tax. Firstly, it did not work from the IHT point of view because his parents and then his mother after his father's death continued to live in the property. After his mother died he sold the property and then someone told him he might have a capital gains problem. He came to me then. Without going into detail, I managed to get him past the capital gains issue (and he easily could have ended up paying capital gains tax if he had not ultimately sought professional advice) but the irony was that both his parents' estates were below the IHT threshold so there never was any inheritance tax to avoid anyway.

I also come across people who think they can avoid capital gains tax by selling their assets pregnant with gain(as we tax people like to say) whilst they are spending a year or so overseas. This is actually a difficult thing to do, and even if possible with careful planning, our amateur tax avoiders do not realise that whatever overseas country they will be spending their time in may well seek to tax the capital gain. At the very least they could end up incurring a lot of professional fees in the overseas jurisdiction.

Yes, it is possible to avoid UK capital gains tax if abroad, but usually only if you are gone for quite a few years. It does not work any more going to Belgium for a year and getting fat on cream cakes and Belgian chocolate in their lovely cafes (Belgians must have an immunity to such temptations) just to avoid CGT, and lovely as New Zealand is, you would really have to be there long enough to go native.

If you think you have a bright idea to avoid paying tax, maybe based on something you heard at the yacht club or whilst going home on the bus, please talk to a professional tax adviser who will put you straight on what you can or can't do, and who will either give you a sensible proposal or let you down gently. A modest fee paid can save you an awful lot of heartache and perhaps a lot of money too.

© Jon Stow 2009

Have you submitted your Tax Return yet?
On our bikes
Exemplary Consulting for Business Support
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