Withdral of concession to hit poorest taxpayers.

Self-employed people hit by illness or bereavement are among the losers of a move to scrap a practice allowing excessive tax demands to be reduced.

Accident victims and the elderly also stand to lose out from the withdrawal of ‘equitable liability’ from April 2010, which was announced by Alistair Darling, the Chancellor, in this year’s Budget.

The concession, applicable to both income and corporation tax, is effectively a safety net from bankruptcy that HMRC can open where deadlines for taxpayers to file and appeal have both passed.

Typically, the Revenue would apply the concession where the liability assessed is greater than the amount which would have been charged had the tax return been submitted on time.

Charities like TaxAid have used the practice to get tax demands cancelled where a vulnerable person has received an incorrect assessment from HMRC but not appealed within the time limit.

Although not widely used by accountants, the practice has, for many years, meant HMRC waived its statutory right to tax where taxpayers show their true liabilities are less than the amounts it is formally demanding.

This means that where HMRC have estimated tax liabilities and taxpayers have not lodged a formal appeal within the statutory 30-day period, HMRC will now pursue those amounts even where taxpayers can prove that their real tax liabilities are less.

Under the concession, the amount of the legal liability is not amended, but HMRC will not pursue the difference between the original liability and the revised amount, which must be evidenced.

But tax officials have questioned the need for it to remain; citing the numerous opportunities the current self-assessment system affords to tell HMRC that the bill is wrong.

Withdrawing the concession, which is based upon the principle that individuals should be required to pay no more than the right amount of tax, will lead to injustices.

This will expose many of the country's most vulnerable taxpayers to debts that they cannot afford and do not actually owe.

Tax commentators also argue that as Her Majesty’s Revenue & Customs has changed the law to ensure people do not pay too little tax, it should also legislate to ensure people do not pay too much.

Despite the proposed removal of the tax waiver, HMRC says there may be a small number of exceptional cases where it will accept that there was a ‘reasonable excuse’ for not making the return, or appealing against it, within the statutory time limits.

“In such cases HMRC will accept the late information and adjust the liability accordingly,” HMRC said in an online statement. “We will also continue to help taxpayers who have difficulty paying what they owe and in appropriate circumstances allow payment to be made over a period of time.”

In August 1995 the Inland Revenue published a Tax Bulletin article 'Excessive assessments: equitable liability' (TB18). The article explained the circumstances in which information received after the statutory deadlines had passed might be accepted as evidence that finalised tax liabilities were too high and a decision taken not to pursue recovery of the full amount assessed.

This concession was originally introduced to protect other creditors when the Inland Revenue's claims in insolvency cases took precedence over the claims of other creditors. Where recovery proceedings concluded with the insolvency of the taxpayer, assessments based on estimated amounts that had not been appealed could sometimes result in unfairness. This is because in the past HM Revenue and Customs (HMRC) had 'Crown preference' for its debts meaning they ranked ahead of other creditors. 'Equitable liability' was introduced to avoid inflated claims from the former Inland Revenue unfairly reducing the money available to other creditors. Use of the concession was also extended to cases outside of insolvency where it was considered appropriate to do so.

Subsequent developments have eroded the justification for accepting time barred information after deadlines have passed:

The introduction of Self Assessment in 1996 means that taxpayers presently have a 5 year (to be reduced to 3 years from April 2010) period both to file a return for any particular year and to displace a legal determination based on an estimated amount.

Prior to Self Assessment a taxpayer had only 30 days in which to appeal against an Inland Revenue estimated assessment.

In 2003 the Inland Revenue lost its preferential creditor status (Crown preference) so that tax no longer takes precedence over other creditors.

The House of Lords' decision in the case of Regina v. Commissioners of Inland Revenue ex parte Wilkinson made clear that HMRC's administrative discretion to grant concessions was narrower than was previously supposed. In light of this, HMRC is reviewing all its published concessions. As part of this review, we have concluded that the practice of equitable liability does not fall within the discretionary power of HMRC.

Equitable liability has been identified as one of ten concessions that will be withdrawn from 1 April 2010. HMRC may, however, accept late returns or information affecting liability where the request for relief under this concession was made and accepted before this date in accordance with TB 18N.

There may be a small number of exceptional cases where HMRC can accept that there was a ‘reasonable excuse’ for not making the return or for not displacing the determination within the statutory time limits. In such cases HMRC will accept the late information and adjust the liability accordingly. We will also continue to help taxpayers who have difficulty paying what they owe and in appropriate circumstances allow payment to be made over a period of time