Danger – beware tax debt advice

If someone has presented with a tax debt, the first question for any adviser has always been, “is this debt correct”? Historically the correct debt was usually established by ensuring that all the outstanding self-assessment tax returns had been submitted.

All change at HMRC
A number of developments have meant that this is no longer the simple solution due to:

1. The late filing penalty regime for self-assessment;
2. HMRC national PAYE system which involves an annual reconciliation process and recovery of underpayments through the issue of P800 tax reconciliation statements; and
3. HMRC chasing old outstanding tax returns and old tax debt

Handling Late Filing Penalties: the late filing penalty regime on its own has meant that when someone presents with a tax debt, the debt may well include a significant self-assessment late filing penalty. If a return is over a year late, the minimum late filing penalty is £1,600, regardless of whether any tax is actually due. It is therefore critical to identify the penalties included in the debt and to consider if they can be appealed on the grounds that the client had a reasonable excuse for the late submission.

When looking at submitting outstanding returns, the fact that different submission deadlines apply for paper and online returns must be recognised. We have seen clients that have been helped by front-line agencies to submit paper returns after the paper return deadline, so incurring late filing penalties that could have been avoided if the client had been assisted to make an online return.

Care needed re PAYE underpayments: P800 PAYE tax calculations are sent by HMRC to PAYE taxpayers to collect underpayments of PAYE. This raises a number of issues that debt advisers need to consider.

First, it is still crucial to establish if the debt is correct, i.e. do the figures used by HMRC agree to the client’s P60s etc.

More importantly, and this is a point we often see missed by debt advisers, it may be possible to challenge whether HMRC should be collecting the debt at all. It may be possible to get HMRC to apply ESC A19 or accept that employer error was in point. We have seen many cases where debt advisers have not realised that the underpayment can be challenged. This area has become more complicated by the fact that HMRC regularly change their guidance, e.g. they have agreed that underpayments caused by a client starting to receive taxable ESA following a transfer from Incapacity Benefit will be written off, even if the case does not fall within the strict criteria of ESC A19.

Clients who have not reached an agreement to pay the underpayments can find themselves put into self assessment with tax returns to complete. In this scenario, it is all too easy for a client to present to a front-line adviser asking for help to complete what looks like a simple tax return. We have seen numerous cases where clients have been helped to complete such tax returns, when in fact, rather than completing any return, the client should have been helped to challenge the original underpayment. A successful challenge can result in the return and any associated late filing penalties being cancelled.

Too many tax returns: HMRC sometimes are over exuberant in issuing tax returns following the non-payment of a PAYE underpayment, and when a client has not settled an underpayment for one year, they issue a tax return not only for that year, but other tax years as well. Where the client has no underpayment in those other years and no other criteria to be in self assessment, the correct course of action is to get the unnecessary returns withdrawn. Again we have seen advisers complete these extra returns, which if they are late, can result in the client incurring late filing penalties which could have been avoided. We have seen an increasing number of cases where HMRC are chasing clients with a number of outstanding tax returns, some of which are for out-of-date years. The danger of just helping clients complete these outstanding and often old returns is that it may be possible to cancel the returns and any associated late filing penalties.

Checking for self-employment where it may be possible to cancel returns: we have seen a number of cases where a client may have had a brief period of self employment (often in construction whilst registered under the Construction Industry Scheme) and subsequently have been in employed PAYE work or on benefits. Due to a lack of understanding of the tax system or even a lack of awareness that they were even registered as self-employed during the period of CIS self-employed work, they have not told HMRC that they ceased being self-employed. In these cases it is important to not just complete the outstanding tax returns. Instead, the returns for years when the client had no need to be in self assessment should be cancelled. This will remove the associated late filing penalties.

It is important to get the tax debt right. If the debt can be significantly reduced, the client may have other options open to them to deal with their debt, e.g. their debt may be reduced to below the threshold for a Debt Relief Order.

Care must be taken not to complete unnecessary tax returns as this can leave the client with late filing penalties that then might prove difficult to appeal.

If tax returns are needed, careful regard must be paid to the submission deadlines for paper and online returns to ensure that no avoidable late filing penalties are incurred.

For more information see the tax debt guide in the taxpayer section. For an understanding of how to handle, in what situations it is suitable to send clients to HMRC/ to their new Needs Extra Support service or to TaxAid, select Voluntary Sector Advisers for our free online training.