To err is human and mistakes are easily made by taxpayers completing their Self-Assessment tax returns. None of us are perfect after all. Where such a mistake leads to an individual paying more tax than was necessary and discovers their error some time down the line, then all is not lost.
Tax returns can be amended to correct mistakes and normally this can only be done within 12 months after the filing date for the return. For example, a person will have until 31st January 2019 to correct a mistake made in their 2017 tax return. What happens, however, if the statutory time limit elapses and the error has not been picked up during that time? In these circumstances a claim for overpayment relief can be made, but it has to be made not later than 4 years after the end of the relevant tax year.
Overpayment relief applies to income tax, capital gains tax and overpaid Class IV NIC, and the rules are contained within Sch. 1AB Taxes Management Act (TMA) 1970. Similar rules are available to companies under Finance Act 1998, Sch. 18, Part IV.
In broad terms, a person can make a claim for overpayment relief where they believe that tax had been paid, assessed, determined or directed erroneously. There are however specific circumstances where relief cannot be claimed, and these are listed in TMA 1970, Sch. 1AB, para. 2 as Case A – Case H as follows:
Where the amount paid, or due, is excessive because of a mistake in any other formal claim, election or notice e.g. failing to make a claim, or capital allowances.
Derek obtains a bank loan for the specific purpose of buying a new car for business use. There are already three other cars available for use in respect of which each year he claims capital allowances.
On the 1 January 2012, Derek submits his 2010-11 return online. In August 2013 Derek realises that he did not include the interest payments from the bank loan in his profit and loss account. He also forgot to claim capital allowances in respect of the new car. A claim to capital allowances must be made in a Self- Assessment tax return.
As Derek is too late to amend his 2010-11 return any overpayment relief claim will be restricted to the relief due in respect of the omitted interest payments. Having made an enquiry into the claim no relief can be given in respect of the omitted capital allowances as it is excluded under Case A.
If there are any other formal means of recovering an overpayment of tax or reducing an excessive assessment, the person must use that instead of overpayment relief. For example, they may be able to obtain a repayment by making or amending their tax return.
If a person knew, or ought reasonably to have known, that they had some other means of correcting an overpayment or over-assessment, they cannot claim overpayment relief if they failed to use those other means within the relevant time limit.
Mr X was the subject of an employer compliance review which established he had deliberately made payments for overtime in cash and did not put these payments through the payroll. The review was settled with Mr X making good the PAYE and NIC (along with interest and a penalty). Mr X knew he was liable to account for PAYE and NIC but he did not declare this or record this in his accounts. His overpayment relief claim for income tax relief for the additional expense is refused under Case C.
If an assessment has been determined on appeal by the Tax Tribunal, overpayment relief is not available if the overpayment relief claim is on the same basis as the appeal. The tribunal’s determination of the point is final.
This also applies where HMRC has settled the appeal by agreement.
If the grounds on which the person is claiming relief could have been put to a tribunal or court on an appeal relating to the amount paid or due.
Mrs Y was the subject of an enquiry into her Self-Assessment tax return. The enquiry established that her accounts deductions were overstated in respect of premises costs. The enquiry was formally settled for additional tax, interest and a penalty. Neither the closure notice nor the amendment to Mrs Y’s tax return on closure of the enquiry was appealed. One year later Mrs Y claimed overpayment relief for further premises costs. This was an issue that could have been dealt with by an appeal against the enquiry conclusions. Her overpayment relief claim is refused under Case E as she ought reasonably to have known that she should have dealt with any further deductions due in respect of premises costs by appealing the enquiry conclusion.
Where HMRC has already taken court action to recover amounts due under an assessment or determination.
Overpayment relief is not due if the claim relates to a mistake in a tax return or other tax calculation and the tax liability was calculated in accordance with the practice generally prevailing at that time, except where the claim relates to PAYE income.
Overpayment relief is not due in respect of PAYE income if the tax liability in respect of that income was calculated in accordance with the practice generally prevailing 12 months after the end of the tax year.
Cases G and H do not apply if the tax charged is contrary to EU law. Furthermore, it is for HMRC to prove that there was a practice generally prevailing.
A claim must be made in writing, not via a tax return, and made within the time limits specified above. However, a special statutory relief exists in cases where it would be unconscionable for HMRC to seek to recover an amount of tax or refuse repayment (if already paid).
Whilst this article has featured on the application of overpayment relief to individuals, it is particularly important to PSC’s caught by IR35 and wanting to claim historical corporation tax relief to the subsequent deemed payment and employers’ NIC.