HMRC issuing demands for tax it has no legal right to following software errors

• Follows HMRC computer error which rejected thousands of returns in 2018 and 2019

• Relates to 2016/17 and 2017/18 self-assessment returns

• Taxpayers should seek immediate advice

HM Revenue & Customs (HMRC) is issuing letters to taxpayers demanding payment of tax it has no legal right to, according to Price Bailey, the Top 30 accountants.

According to Price Bailey, tens of thousands of self-assessment returns were rejected for the 2016/17 (31 January 2018) and 2017/18 (31 January 2019) filing deadlines due to a problem with HMRC’s software, which meant that it could not always accurately calculate the amount of tax due if taxpayers had unusually complex tax affairs, or if reported income was significantly different from HMRC’s expectations.

Price Bailey says that HMRC can correct errors in tax returns and demand any unpaid tax but this must be done within nine months of the date on which the particular tax return was delivered to HMRC. In most cases, that nine-month window has now closed, meaning that HMRC has no legal basis for demanding tax that was underpaid through no fault of the taxpayer.

Price Bailey warns that many taxpayers receiving letters relating to their 2016/17 and/or 2017/18 tax returns are unlikely to be aware of HMRC’s legal position and may pay the tax anyway without seeking advice.

Jay Sanghrajka, Partner at Price Bailey, comments: “HMRC had until the end of October 2019 to make corrections to 2017/18 tax returns and demand payment. Most of those returns would have been filed on or before the 31 January deadline, which means that in many cases HMRC has missed its chance to correct those returns. Taxpayers who have already paid as a result of receiving a correction letter might be able to ask for their money back.”

“Many taxpayers who receive a letter from HMRC are likely to assume the revised calculation is correct and pay without first seeking a second opinion. In some cases, the amount of tax being demanded runs into tens of thousands of pounds, which likely will cause some taxpayers emotional distress and financial difficulty.”

He adds: “The statutory position is that these corrections do not appear to be formal enquiries or discovery assessments. The time limit for opening an enquiry into 2017/18 tax returns ran out on 31 January 2020. Enquiries into 2016/17 returns had to be opened by 31 January 2019 at the very latest.”

Price Bailey points out that when HMRC misses enquiry deadlines they often raise discovery assessments instead, where the time limit is four years, or six years in cases of carelessness.

Jay Sanghrajka says: “It is difficult to see how a tax inspector could “discover” an error, which was created by a flaw in HMRC’s software, and attribute that to a taxpayer. If a taxpayer refused to pay and HMRC opened discovery assessment in response, it is doubtful whether a tribunal judge would consider a discovery assessment valid in such circumstances.”