Andrew Hubbard

Written by: Andrew Hubbard

Andrew Hubbard


Overstating your tax liability? On your head be it!

What happens if you make a mistake on your tax return? If the effect of your error is to under-declare your tax liability, you face an HMRC investigation and having to pay the tax with interest and perhaps penalties.

But what happens if the effect of your error is that you overstate your liability? You might think that would never happen. In fact, it is more common than you might expect.

HMRC recently did an exercise where they compared a sample of returns filed by taxpayers in the normal way with a similar sample of returns where the information had been put in automatically using information directly from employers.

They were surprised to find that, on average, people did indeed tend to overstate their liability when completing their returns themselves. Given the complexity of the tax system it is not altogether surprising that people sometimes fail to claim deductions to which they are entitled or declare non-taxable sources of income.

So back to my question. What happens if a taxpayer does overstate liabilities in a return? I’m prompted to ask this because there have been a couple of recent tribunal cases where taxpayers have found that they have been unable to correct their mistakes.

Why is this? Under self-assessment it is the taxpayer’s responsibility to declare income and assess the tax which is due. HMRC plays no part in this process. If HMRC enquires into a return and issues an assessment a taxpayer has a right of appeal, but there is no right of appeal against your own self-assessment if HMRC has not disputed it.

You can’t go to a tribunal and say, ‘I got my tax return wrong – can you put matters right so I end up paying the right amount of tax?’ In the cases to which I refer above, the tribunal, though sympathetic to the taxpayers involved, threw them out on the basis that they had no power to do anything.

This is not to say that the taxpayer is completely powerless. Anybody who submits a return has a year in which to amend it. Once that time limit has expired there is a formal process for making a claim for what is called ‘overpayment relief’. This has to be made within four years of the end of the relevant tax year. The rules are complex and do not give an absolute right to repayment in all circumstances.

Once the four-year deadline has passed that is the end of the matter and there are no further avenues open to somebody who has filed a return which overstates his or her income.

Now you might think that four years is plenty of time to put matters right and, of course, for a well-organised individual who keeps on top of financial matters that is probably right, though of course such people are less likely to make mistakes in the first place.

But for many taxpayers, particularly small traders, life is not like that. People do get themselves in the most appalling muddles and sometimes it takes years for problems to surface and then many more years to put them right. One of the recent cases involved problems which dated back 15 years. The four-year time limit is simply not long enough for such people.

There is a balancing act here. There has to be some form of time limit. If today I found that 25 years ago I paid £1.50 too much in tax, I think most people would accept that I shouldn’t be able to get a refund. But is four years too short?

The four-year limit is there to give symmetry – HMRC can go back four years to assess tax which was underpaid because of a simple error (there are extended time limits for deliberate behaviour) and so the same limit applies in reverse where the taxpayer makes an error by declaring too much tax.

This is logical, but I am not sure that it is right. It seems to me that there should be more leeway given to taxpayers who accidentally overstate their liability. They don’t have the entire apparatus of the state to come to their aid, whereas, of course HMRC does if the error is in the other direction. Wherever the line is drawn there will be hard cases, but I do believe that this does need looking at again.

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