I acted for a client several years ago, when he was self-employed, but the business terminated and he then commenced employment with a large local authority employer, and was employed by them up to May 2006. At that point, he was medically retired, and thereafter received a pension from his former employer (upon being presented with form P46 in relation to that employment pension, he correctly indicated thereon that he had no other taxable employment Income). A few weeks later, he started to receive Incapacity Benefit and duly notified jobcentreplus of his employment pension Income. In subsequent years, he has, upon request, supplied jobcentreplus with details of his employment pension Income. Having not acted for him for many years, I was approached by him two months ago to advise of his having received, from HMRC, Tax Calculations for 2008/2009 and 2009/2010 (approximately £700 payable for each year) and that, upon enquiry with HMRC, he established that this £1,400 related of course to the Incapacity Benefit, which HMRC then contended he had omitted to declare to them. He had assumed that, having notified jobcentreplus of his employment pension (and since the amount of that employment pension Income impacted upon his Incapacity Benefit) he was paying the correct amount of tax (the PAYE Coding on his employment pension was the basic Personal Allowance). HMRC then advised him that, on the purported grounds that there was insufficient income to collect the £1,400 through PAYE Codings, Self Assessment Tax Returns would have to be submitted for 2008/2009 and 2009/2010, upon which he would need to contact HMRC again to agree payment terms (the total annual current income, from the employment pension and Incapacity Benefit, is approximately £10,400).
The Incapacity Benefit will have been, so I understand, tax-free for the first six months up to November 2006.
My view is that the established Concession should “take care of” the 2008/2009 under-payment, albeit HMRC may continue to contend that he failed to notify them of the taxable Incapacity Benefit Income – my response to such contention would be that, for all tax years from 2006/2007 onwards, forms P60 have been issued in respect of both sources of income, and the corresponding information will thus have been received by HMRC.
The “downside risk” to making an issue of matters with HMRC is that they might issue Tax Calculations (and then no doubt also Self Assessment Tax Returns) for 2006/2007 and 2007/2008 [the potential tax payable for those two years being approximately £900, allthough of course HMRC might later seek to collect tax for those two earlier years in any event].
Correspondents’ views would be appreciated - one small matter which I would especially appreciate views upon is how jobcentreplus would have established what PAYE Coding to apply to the Incapacity Benefit from November 2006 onwards.
The Tax Faculty comments:
Although we can’t tell you how to act on a behalf of a specific client, the Tax Faculty can offer some comments and suggestions which may help.
As I’m sure you realise, the tax calculations for 2008/09 and 2009/10 will have arisen from HMRC’s automatic reconciliation exercise using its new NPS computer. The Government issued an update about this which we covered in a January 2011 news item.
Among other things this confirmed that HMRC is not going to go back earlier than 2007/08 in issuing underpayments. On the other hand, it is going to do the reconciliations and send out demands for 2007/08, so your client may find himself getting a demand for that year too (whether you raise the issue with HMRC or not).
A few points about incapacity benefit. You are correct that as he first started getting this in 2006, it is taxable except for the lower-rate short-term IB which is payable for up to 28 weeks at the beginning of the claim.
The DWP will deduct tax from incapacity benefit if the recipient does not have a PAYE source of income – so presumably, since in this case the DWP knew about the pension, it would not have attempted to operate PAYE on the IB itself. Just for info, the way the DWP operates PAYE on incapacity benefit is explained in the HMRC manuals.
However, the DWP is responsible for determining whether IB is taxable and for notifying HMRC when a person starts to receive taxable benefit. This is relevant if you are planning to make a claim under Extra-statutory Concession A19, as it is not just information supplied by the taxpayer which is relevant for A19, but also information supplied by the DWP. In other words, HMRC should have been told about the IB by the DWP, and it might be worth reminding HMRC of this and finding out if it did actually have that information.
Another relevant point is that if ESC A19 applies to 2008/09, it is even more likely to apply to the earlier year of 2007/08, especially where the cause of the underpayment was the same.
In fact, ESC A19 could also apply to 2009/10 (even though this is a recent year). ESC A19 says that HMRC may waive arrears of tax notified 12 months or less after the end of the relevant tax year if HMRC failed more than once to make proper use of the facts they had been given about one source of income, and/or allowed the arrears to build up over two whole tax years in succession by failing to make proper and timely use of information they had.
Of course, one of the key things for A19 treatment is that the taxpayer must reasonably have believed that their affairs were in order. Based just on what you say here, it does sound as though your client has good grounds to argue this.